Rupiah Update Indonesia: What Causes the Slight Depreciation Today?

The positive macroeconomic data includes Indonesia’s USD $2.43 billion trade surplus in the first quarter of 2015. This surplus will have a good impact on the country’s ailing current account deficit. Late last week, Indonesia’s central bank (Bank Indonesia) adjusted its forecast for the current account deficit to 1.6 percent of gross domestic product (GDP) in the January-March 2015 period, lower than the institution’s initial forecast of 2 percent of GDP. For investors an easing current account deficit is a source of relieve.

Also Bank Indonesia’s decision to leave the country’s key interest rate unchanged at 7.50 percent should provide support for the rupiah. The central bank refrained from altering its interest rate environment as the institution is confident that the current environment is able to guide both inflation and the current account balance towards the bank’s target ranges.

Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.09 percent to IDR 12,875 per US dollar on Monday (20/04).

Indonesian Rupiah versus US Dollar (JISDOR):

| Source: Bank Indonesia

However, Indonesia's Chief Economic Minister Sofyan Djalil stated on Monday (20/04) that he feels comfortable with a weak rupiah at the current level. Analysts also assume that Bank Indonesia would use ‘rupiah undervaluation’ as a strategy to combat the country’s current account deficit as a weak rupiah would theoretically boost exports and limit imports. Therefore, in combination with bullish US dollar momentum ahead of further monetary tightening in the USA, the rupiah is expected to depreciate further in the remainder of 2015.

The rupiah may also be feeling the negative impact of the government’s plan to abolish premium fuel (low-octane). By 2017 the production and consumption of premium should be stopped altogether. Premium was a government-subsidized fuel introduced in Indonesia several decades ago when Indonesia was an OPEC member and net oil exporter. Former President Suharto introduced premium to support low-income Indonesians. However, several studies indicate that it is actually the middle class and high-income class that benefit most from these subsidies. Due to this ‘injustice’ (and due to economic disturbances triggered by artificially low fuel prices), current President Joko Widodo cut public subsidies for premium at the start of 2015.

Other negative aspects of premium are that this fuel is costly to blend, damages the engine of cars and motorcycles (on the long-term), and is a highly polluting fuel.

As such, state-owned energy company Pertamina will now gradually introduce a higher-grade fuel in May 2015 (implying that the company’s refineries need to be upgraded) called 90-octane Pertalite.

The negative impact of Pertalite on the rupiah is that this higher-grade fuel will cause inflationary pressures as it is more expensive than premium.

Meanwhile, Indonesia’s benchmark stock index fell 0.42 percent to 5,387.95 during the first trading session on Monday.

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