Analysis Performance of the Indonesian Rupiah Exchange Rate

Last week, Bank Indonesia Governor Agus Martowardojo indicated that a weaker rupiah would be able to improve the country’s trade balance as imports become more expensive while exports become more competitive on the global market. For market participants, these were signs that the central bank will not intervene too much to support the rupiah and therefore a further weakening of the rupiah is expected in the foreseeable future.

Meanwhile, the central bank of China (People’s Bank of China) cut its key interest rates by 25 basis points each. The country’s one-year deposit rate was cut to 2.50 percent while the one-year lending rate was cut to 5.35 percent, in a move to spur inflation. This move sent China’s currency (yuan) to a two-year low against the US dollar. Being Indonesia’s largest trading partner a weakening yuan places depreciating pressures on the rupiah.

Indonesia’s currency is now getting closer and closer to the psychological boundary of IDR 13,000 per US dollar, a level not seen since the aftermath of the Asian Financial Crisis in the late 1990s. This crisis hit Indonesia hard as it was not only a financial crisis but also developed into a full social and political crisis, hence bringing back traumatized memories to Indonesian business players, policy makers and the people.

On Monday (02/03), Indonesian Finance Minister Bambang Brodjonegoro also said that today’s rupiah performance was negatively affected by sluggish economic growth in China, the world’s second-largest economy. As China’s economy is forecast to continue its slowing growth pace, currencies in emerging Asia are expected to depreciate against the US dollar, particularly as the Federal Reserve has tightened its monetary policy (scrapping the quantitative easing program last year and it is now only a matter of time before US interest rates will be raised implying the flow of capital from emerging markets to the USA) amid an improving US economy. Minister Brodjonegoro expects Indonesia’s central bank (Bank Indonesia) to intervene in the market when needed. However, he did not state at what level he expects Bank Indonesia to intervene. A central bank can decide to use its foreign exchange reserves to support the domestic currency. At the end of January 2015, Bank Indonesia’s forex reserves stood at USD $114.3 billion. Traders in fact suspect that Bank Indonesia already intervened today when the currency was hovering near the IDR 13,000 per US dollar level.

Macroeconomic data of Indonesia, released by Statistics Indonesia today, was mixed. Although easing inflation is positive (inflation eased to 6.29 percent y/y in February from 6.96 percent in the previous month on the back of declining fuel and food prices, except for rice), Indonesia’s manufacturing activity (HSBC Markit Purchasing Managers' Index/PMI) contracted for the fifth consecutive month in February and hit an all-time low at 47.5 in February (from 48.5 in the preceding month). Production and new orders were both down.

Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 1.01 percent to IDR 12,993 per US dollar on Monday (02/03).

Indonesian Rupiah versus US Dollar:

| Source: Bank Indonesia

Meanwhile, Indonesia’s benchmark stock index (Jakarta Composite Index) closed at another record high on Monday. The index rose 0.51 percent to 5,477.83 points. Indonesia’s easing inflation figure implied good performance of interest-rate sensitive stocks (particularly in the banking and automotive sectors). Easing inflation was cited by Bank Indonesia as the key reason to cut its benchmark interest rate by 25 basis points to 7.50 percent in mid-February (a move that creates room for accelerated economic growth). Therefore, as inflation continues to ease, analysts believe that the central bank may decide to conduct further interest rate cuts in 2015.

Jakarta Composite Index:

Inflation in Indonesia:

Month	Monthly Growth           2013	Monthly Growth           2014	Monthly Growth           2015
January	1.03%	1.07%	-0.24%
February	0.75%	0.26%	-0.36%
March	0.63%	0.08%
April	-0.10%	-0.02%
May	-0.03%	0.16%
June	1.03%	0.43%
July	3.29%	0.93%
August	1.12%	0.47%
September	-0.35%	0.27%
October	0.09%	0.47%
November	0.12%	1.50%
December	0.55%	2.46%
Total	8.38%	8.36%	-0.61%

^{Source: Statistics Indonesia (BPS)}

Inflation in Indonesia 2008-2014:

	2008	2009	2010	2011	2012	2013	2014
Inflation (annual percent change)	9.8	4.8	5.1	5.4	4.3	8.4	8.4

^{Source: World Bank}

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