14 August 2018 (closed)
USD/IDR (14,619) -2.00 -0.01%
EUR/IDR (16,634) +60.59 +0.37%
Jakarta Composite Index (5,769.87) -91.37 -1.56%
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Today's Headlines Rupiah
The central bank of Indonesia raised its benchmark interest rate (the seven-day reverse repo rate) by 25 basis points (bps) to 5.50 percent at the August 2018 policy meeting. The decision was in line with our expectations as heavy pressures have been affecting the rupiah after the collapse of the Turkish lira.
Indonesian assets are under pressure on Monday (13/08). By 16:00 pm local Jakarta time, the Indonesian rupiah had depreciated 0.90 percent to IDR 14,608 per US dollar, while the benchmark Jakarta Composite Index had plunged 3.55 percent. Although all emerging markets in Asia are under pressure on Monday, Indonesia is seemingly the most fragile one.
The central bank of Indonesia (Bank Indonesia) believes that the Indonesian government needs to make a more careful selection in terms of infrastructure development projects in order to curtail the big amount of imports that put pressure on the country's current account balance and rupiah exchange rate.
The Indonesian rupiah had been fairly stable against the US dollar since Bank Indonesia's aggressive 0.50 percent rate hike in late-June (a move that caught many by surprise). However, after the central bank of Indonesia decided to leave its benchmark interest rate unchanged at the July policy meeting (which was concluded on Thursday, 19/07), the rupiah has become under heavy pressure again.
The current account deficit of Indonesia could widen to 2.5 percent - or more - of the nation's gross domestic product (GDP) in the second quarter of 2018 according to Bank Indonesia's Senior Deputy Governor Mirza Adityaswara. He added that a current account deficit below 3 percent of GDP is still in the safe zone. Dividend payouts are expected to put additional pressure on the Q2-2018 current account deficit of Indonesia.
In theory the weak rupiah makes Indonesian export products more competitive on the global market. However, when the content of those export products contain a high degree of imported raw materials, then the positive effect of a weak rupiah is disabled. And the situation is similarly complicated for those companies that import a high degree of raw materials to make products that are sold on the domestic market. They could of course simply raise retail prices. However, the consequence is that demand for the products could drop.
The central bank of Indonesia (Bank Indonesia) announced that the nation's foreign exchange reserves had fallen to USD $119.8 billion (per end June 2018), thus declining USD $3.1 billion compared to the position in the preceding month. As such, the recent trend continued: Indonesia's foreign exchange assets have now fallen for five straight months after touching a record high of nearly USD $132.0 billion in January 2018 (see table below).
Risk perceptions on Indonesian debt have risen amid concerns over the fragile rupiah. So far in 2018 the Indonesian rupiah has depreciated around 6 percent against the US dollar due to US monetary tightening and simmering concerns over the outbreak of a global trade war. Waning risk perception is reflected by the rising credit default swap (CDS) of the five-year Indonesian bond.
The central bank of Indonesia (Bank Indonesia) hiked its benchmark interest rate three times over the past six weeks - by a total of 1.00 percent to take the benchmark to the level of 5.25 percent - in order to defend the rupiah. Last Friday (27/06) Bank Indonesia surprised part of the market by implementing a 0.50 percent rate hike. As a result, the rupiah strengthened markedly. However, its impact on the rupiah performance seems very temporary. This week the rupiah is again depreciating, hovering around the IDR 14,400 per US dollar level.
As we had predicted this morning, Bank Indonesia decided to raise its benchmark interest rate by 50 basis points (bps) to 5.25 percent at the two-day June policy meeting that was concluded earlier today. Presumably markets had been expecting a 25 bps rate hike (therefore being priced in already) and therefore the central bank of Indonesia possibly felt it had to take a more aggressive approach to defend the Indonesian rupiah that had weakened beyond the IDR 14,400 per US dollar level.
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Concerns about Indonesia's current account balance increased after Bank Indonesia announced last week that the country's current account deficit widened to USD $8.02 billion, or 3.0 percent of gross domestic product (GDP), in the second quarter of 2018. It is Indonesia's highest quarterly deficit since Q3-2014, thus putting additional pressures on the rupiah exchange rate.
There are doubts whether Indonesia's gross domestic product (GDP) growth can reach 5.2 percent year-on-year (y/y) in full-year 2018 as Indonesia is experiencing a couple of major challenges. Challenges include the global trade war, the fragile rupiah, Bank Indonesia's higher benchmark interest rate, the current account deficit, and political tensions ahead of the 2019 legislative and presidential elections. Currently, Indonesia Investments' forecast for Indonesia's economic growth is set at 5.2 percent (y/y) in 2018.
Chief executive officers (CEOs) in Indonesia have become slightly less optimistic about the Indonesian economy and politics. This makes sense considering the presence of simmering global trade tensions, sharp rupiah depreciation against the US dollar, and Bank Indonesia's recent series of interest rate hikes.
One of the national industries that is heavily affected by the weak rupiah exchange rate is Indonesia's pharmaceutical industry. Considering around 90 percent of raw materials in the pharmaceutical industry need to be imported from abroad (in US dollars), production costs rise sharply in times of significant rupiah depreciation. It is estimated that materials imported from abroad account for about 75 percent of pharmaceutical companies' total production costs.
In an ad hoc press conference on Thursday (26/04) Bank Indonesia Governor Agus Martowardojo provided an update on the performance of the Indonesian rupiah as well as an update on the strategies that are - or can be - used by the central bank to safeguard a stable rupiah. When the ad hoc press conference was announced we initially expected to see an interest rate hike. However, based on a statement from Bank Indonesia, this seems to be the last option the central bank wants to use.
Indonesia's benchmark Jakarta Composite Index fell 1.24 percent to 6,229.63 points on Tuesday (24/04). The performance of Indonesian stocks were in line with the general trend in Southeast Asia. Due to rising US treasury yields (touching nearly 3 percent, its highest level since January 2014) investors withdraw their funds from riskier assets in emerging markets. Concerns over US inflation and the fiscal deficit are behind the rising US treasury yield.
The central bank of Indonesia (Bank Indonesia) said the country's current account deficit remained under control, albeit widening in the last quarter of 2017. Indonesia's current account deficit reached USD $5.8 billion or 2.2 percent of gross domestic product (GDP) in Q4-2017 (up from a deficit of USD $4.6 billion or 1.7 percent of GDP in the preceding quarter).
Although the Indonesian rupiah has been strengthening against the US dollar since mid-December 2017, the rupiah may encounter serious pressures in the year 2018 amid US tax reforms, the US Federal Reserve's further monetary tightening, and unstable geopolitics. Meanwhile, Indonesian exports are expected to grow, but only in the range of 5-6 percent year-on-year (unlike 2017 when the nation's exports rebounded 17 percent).
Earlier this week, the central banks of Indonesia (Bank Indonesia), Malaysia (Bank Negara Malaysia), Thailand (Bank of Thailand) jointly announced the launch of the local currency settlement framework. This framework aims at boosting the use of local currencies in transactions (specifically related to trade and investment) conducted between Indonesia, Malaysia and Thailand in an effort to reduce these countries' dependence on the US dollar.
The Bank Indonesia (BI) Board of Governors agreed to hold the BI 7-day Reverse Repo Rate at 4.25 percent, while maintaining the deposit facility and lending facility rates at 3.50 percent and 5.00 percent, respectively, effective per 20 October 2017. The decision was in line with efforts to maintain macroeconomic and financial system stability, while stimulating the domestic economic recovery.
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