What Impacted on the Indonesian Rupiah Exchange Rate this Week?

This week, Asian currencies may experience the biggest weekly gain in over four months because economic recovery in the United States is still rather sluggish (US retail sales were stagnant in July 2014, the weakest performance in the past six months, while US jobless claims were 311,000 last week, higher than the forecast of 295,000) implying that the US Federal Reserve may postpone raising US interest rates. A delay in US monetary tightening is important for Asian currencies as it increases demand for lucrative, yet riskier assets in emerging economies (this week global investors pumped USD $1.3 billion into the six Asian emerging stock markets tracked by Bloomberg). When US interest rates rise, however, we expect capital outflows from these emerging markets, including Indonesia.

Despite Indonesia’s widening current account deficit, the rupiah (JISDOR) appreciated 1.09 percent against the US dollar over the past week. The current account deficit, which has been a structural problem since 2011, widened to USD $9.1 billion, or, 4.27 percent of the country's gross domestic product (GDP) in the second quarter of 2014. This outcome was larger than previously estimated. The central bank of Indonesia previously assumed that the deficit would be about 4.0 percent of GDP. In the first quarter of 2014 Indonesia posted a deficit of 2.05 percent of GDP. Traditionally, this deficit widens in the second quarter of the year. In Q2-2013, the country recorded a record high deficit of USD $10.1 billion (or 4.47 percent of GDP). The current account balance is the broadest measure of trade.

The rupiah was supported, however, by political development in Southeast Asia’s largest economy. The market is increasingly speculating that the court case filed by defeated presidential candidate Prabowo Subianto stands no chance. Subianto challenged the official result of the presidential election at the Constitutional Court claiming that there has been massive violations at polling stations as well as during the counting process. Based on the official result (released by the General Elections Commission or KPU) Joko Widodo won the election with 53.15 percent of the votes.

On Thursday (14/08), Bank Indonesia also announced to maintain its benchmark interest rate (BI rate) at 7.50 percent in August as this level is regarded to keep inflation in check and to limit the current account deficit.

Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.22 percent to IDR 11,693 per US dollar on Friday (15/08).

| Source: Bank Indonesia

Bloomberg reported that “the yield on the government’s 8.375 percent bonds due March 2024 dropped eight basis points, or 0.08 percentage point, since 8 August to 7.22 percent, according to the Inter Dealer Market Association. The yield climbed one basis point on Friday (15/08).”

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