Indonesia’s Rupiah at 6-Year Low; Expected to Weaken until Mid-2015

The solid US economic data imply that speculation about a sooner-than-expected US interest rate hike heightens thus leading to capital outflows from emerging economies such as Indonesia. Countries that are plagued by a current account deficit are more vulnerable to these outflows. In the third quarter of 2014 Indonesia posted a USD $6.84 billion current account deficit, or 3.07 percent of the country’s gross domestic product (GDP). Bloomberg noted that global investors pulled IDR 9.2 trillion (USD $739 million) from the country’s sovereign bonds in the first ten days of December.

Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.78 percent to IDR 12,432 per US dollar on Friday (12/12).

Indonesian Rupiah versus US Dollar (JISDOR):

| Source: Bank Indonesia

Indonesia’s central bank (Bank Indonesia) stated on Friday that the current weakening trend of the rupiah is normal and in line with the country’s economic fundamentals. Bank Indonesia Deputy Governor Mirza Adityaswara said that amid the US dollar’s bullish momentum Asian currencies are destined to depreciate on the short term. “Japan’s yen has depreciated 15 percent and Malaysia’s ringgit by about 6.5 percent this year. Therefore, this year’s 2 percent decline of the rupiah is not that bad,” he said.

Standard Chartered Bank economist Fauzi Ichsan expects that the rupiah will continue to depreciate against the US dollar until mid-2015 due to the improving US economy and subsequent monetary tightening in the world’s largest economy. The US Federal Reserve may hike its key interest rate in the second or third quarter of 2015 and ahead of this hike global currencies, particularly emerging market currencies, will experience depreciating pressures on the back of worldwide US dollar demand.

Ichsan believes that Indonesia’s currency may touch IDR 12,500 per US dollar in the first half of 2015 before stabilizing at IDR 11,900 per US dollar. Ichsan expects the currency to stabilize in the second half of 2015 due to an improved trade balance (Indonesia’s recent fuel price hike will curb costly oil imports) and another looming interest rate hike of Indonesia’s central bank. In mid-November 2014, the central bank (Bank Indonesia) already raised its key interest rate (BI rate) from 7.50 percent to 7.75 percent to combat accelerated inflation after the government’s fuel price hike (prices for low-octane gasoline and diesel were raised by more than 30 percent in an effort to reallocate government spending from fuel consumption to more productive sectors). To limit capital outflows ahead of higher US interest rates, Bank Indonesia may raise its BI rate to 8.25 percent.

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