Rupiah Update Indonesia: Central Bank Ready to Intervene
Bank Indonesia Governor Agus Martowardojo said that although the recent weakening trend of the Indonesian rupiah exchange rate is in line with the performance of other Asian currencies, the central bank is prepared to intervene in the market in an effort to support the currency and keep it in a comfortable range. On Monday (06/10), Bank Indonesia Executive Director Tirta Segara already stated that foreign exchange intervention was conducted in September 2014 in order to stabilize the rupiah exchange rate.
As a result of the intervention, Indonesia’s foreign exchange reserves fell slightly (by USD $60 million) by the end of September.
From its strongest position (this year) at IDR 11,271 per US dollar (on 1 April 2014), Indonesia’s currency has weakened 8.15 percent to IDR 12,190 per US dollar amid (looming) monetary tightening in the USA and political uncertainties in Indonesia.
| Source: Bank IndonesiaIndonesian Finance Minister Chatib Basri confirmed that the rupiah - similar to other Asian currencies - has had to cope with a strengthening US dollar as the USD supply (quantitative easing) has been wound down and the Federal Reserve is expected to raise its key interest rate in mid-2015 as economic recovery of the USA is structural. When US interest rates are raised it is expected to result in capital outflows from emerging economies including Indonesia. Basri added that the current political situation has a negative impact on the rupiah for the short-term. The World Bank’s October East Asia Pacific Economic Update, released on Monday (06/10), also signalled these risks of capital outflows from Indonesia. As there is large foreign presence in Indonesia’s stock and bond markets, the country is vulnerable to global shocks. Moreover, Southeast Asia’s largest economy relies on foreign capital to finance the current account deficit. Indonesia has had to cope with a structural current account deficit since late 2011. In the second quarter of 2014, the current account deficit was USD $9.1 billion, or 4.27 percent of gross domestic product (GDP).
Political uncertainties stem from the Merah-Putih coalition (led by defeated presidential candidate Prabowo Subianto) controlling a majority in Indonesia’s parliament and thus has power to thwart president-elect Joko Widodo’s reform programs. Widodo (popularly known as Jokowi) can rely on the support of the market but after seeing that the Merah-Putih coalition managed to pass a new bill which abolishes direct elections in the regions as well as to control the key position of speaker of the House of Representatives (DPR), investors have become concerned.
Last week, a Bank Indonesia official stated that the bank may purchase bonds on the secondary market if the yield spiked too high in the short time. Market participants see this statement as a sign that the bank is ready to intervene if needed (Bank Indonesia rarely intervenes in the bond market).
Based on the Bloomberg Dollar Index, the rupiah had appreciated 0.11 percent to IDR 12,198 per US dollar by 12:00 noon local Jakarta time zone on Tuesday (07/10).
Meanwhile, Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) appreciated 0.18 percent to IDR 12,190 per US dollar.