The devaluation of the yuan triggered concern about the condition of the Chinese economy. It is assumed that the world’s second-largest economy allowed a weakening yuan in order to boost the country’s export performance, hence boosting economic growth. However, it also triggered fears of a currency war as other markets need to keep their export products competitive.

Earlier this week, the rupiah depreciated to a new 17-year low against the greenback due to heavy yuan depreciation, while Indonesia’s benchmark stock index (Jakarta Composite Index) touched a 1.5-year low. Indeed, a big rebound occurred on Thursday (13/08) as stocks were pushed back up by 2.34 percent (due to a technical rebound and perhaps supported by President Joko Widodo’s decision to reshuffle his cabinet composition). However, the rupiah only rebounded slightly (by 0.24 percent) against the US dollar and is expected to remain weak due to looming higher US interest rates. But, on a positive note, a weaker rupiah makes Indonesia’s exports more competitive on the international market and will therefore manage to curtail the country’s wide current account deficit.

In response to the recent performance of the Indonesian rupiah, Indonesia’s Financial Sector Stability Coordination Forum (FKSSK) warned about the pressure of an undervalued rupiah. It sees the current value of the rupiah far from its fundamental value and therefore requests government institutions and the central bank to coordinate efforts to guide the currency (and stocks) back to the fundamental value and to maintain stability of treasury notes.

Agus Martowardojo, Governor of Indonesia’s central bank (Bank Indonesia), emphasized that the central bank will continue to intervene in the market in order to combat high volatility of the rupiah. Martowardojo stated, seemingly slightly disagreeing with the FKSSK, that current pressures on the rupiah (stemming from bullish US dollar momentum) can be overcome provided that Indonesia’s economic fundamentals improve (possibly referring to the country’s economic growth pacecurrent account balance and inflation).

Former Indonesian Finance Minister Chatib Basri commented on the yuan devaluation saying that it has now become even more crucial for Indonesia to rely on domestic consumption in order to trigger accelerated growth (domestic consumption already accounts for about 55 percent of Indonesia’s GDP growth). According to Basri, export products of other Asian countries, including Indonesia, will become less competitive hence curbing economic growth. Meanwhile, as imports become more expensive for China’s industries, Chinese demand for (foreign) commodities will reduce, thus Indonesia’s commodity export performance (which has already been plagued by low commodity prices) will decline further. Lastly, the devaluation of the yuan may trigger a currency war. This may make the Federal Reserve decide to postpone raising its interest rate regime. As a result global markets will continue to experience a prolonged period of volatility and uncertainty. For the rupiah and Indonesian stocks this may mean a prolonged period of weakening. Therefore Basri advises the Indonesian government to invest in development programs (such as infrastructure and social development).

On Friday (14/08), Indonesia’s benchmark stock index had fallen 0.31 percent to 4,569.96 by 14:05 pm local Jakarta time. The rupiah had depreciated 0.07 percent to IDR 13,777 per US dollar by the same time (according to the Bloomberg Dollar Index). Meanwhile, Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.12 percent to IDR 13,763 per US dollar on Friday.

Indonesian Rupiah versus US Dollar (JISDOR):

| Source: Bank Indonesia