Can Bank Indonesia’s US Dollar Purchase Restriction Support the Rupiah?
Last week, Indonesia’s central bank (Bank Indonesia) refrained from adjusting its relatively high interest rate regime as it is committed to support the ailing rupiah and combat high inflation. Another decision that was revealed by Bank Indonesia is the soon-to-be-introduced regulation that limits total (non-collateral) monthly US dollar purchases to USD $25,000 (down from USD $100,000 previously). This regulation will be implemented in a move to thwart speculators that want to take advantage of the weak and volatile rupiah.
The Indonesian rupiah has depreciated nearly 12 percent against the US dollar so far in 2015, hence being the second-worst performing Asian currency tracked by Bloomberg (after Malaysia’s ringgit). Indonesia’s currency is currently touching a 17-year low and for many investors, policymakers and people this brings back traumatized memories of the Asian Financial Crisis in the late 1990s. However, it should be noted that there are big differences between the weak rupiah during the 1997-1998 crisis years and present times. The current weak rupiah is not caused by a contagion effect confined to several Asian markets but is brought about by global bullish US dollar momentum amid tighter US monetary policy. As such, basically all currencies across the globe are weakening against the US dollar.
Moreover, the economic fundamentals of Indonesia are currently much stronger than in the 1990s. The country’s financial sector, which was at the heart of the crisis, is currently healthy as supervision on liquidity of the banking sector is much more strict and transparent, while the rupiah is not pegged to the US dollar anymore. Lastly, macroeconomic ratios of Indonesia, including the debt-to-GDP ratio and foreign exchange reserves, are currently much stronger. In a recent report, titled “2Q15 GDP Remains in Low Growth Channel; What Lies Ahead?” published by Morgan Stanley, the American multinational financial services corporation says hard landing growth is unlikely as Indonesia has maintained a healthy debt-to-GDP ratio for the past couple of years. The report also says Indonesia should correct the current situation through fiscal and monetary policy tightening (which comes at the expense of higher economic growth and is therefore not expected to be a strategy used by Bank Indonesia as the country's economic growth has already slowed to a six-year low of 4.67 percent y/y in the second quarter of 2015).
Still, concerns about the performance of the rupiah persist. Bank Indonesia Governor Agus Martowardojo stated recently that the rupiah is undervalued. According to the Bloomberg Dollar Index Indonesia’s rupiah now stands at IDR 13,941 per US dollar. Last Friday (21/08), Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.41 percent to IDR 13,895 per US dollar.
Indonesian Rupiah versus US Dollar (JISDOR):
| Source: Bank IndonesiaBank Indonesia’s new regulation (that limits monthly US dollar purchases) was met with skepticism by Eric Sugandi, economist at the Standard Chartered Bank. Sugandi says that, unless there is an express reason related to foreign trade, the new regulation is unlikely to have a positive effect on the performance of the rupiah as external pressures are simply too strong. These pressures involve the looming further tighter US monetary policy (higher US interest rates) and the recent decision of China to allow yuan devaluation (hence giving rise to a currency war among emerging markets as they want to maintain competitive export products). Meanwhile, domestic US dollar demand from companies with foreign trade needs or foreign debt repayment requirements remains high. Therefore, Sugandi expects that the Indonesian rupiah will remain around IDR 13,900 per US dollar for the remainder of the year.
A persisted weakness of Indonesia is the sizeable current account deficit. This deficit was one of the main reasons why Southeast Asia's largest economy was plagued by severe capital outflows when the US Federal Reserve first announced a plan to taper off its monetary stimulus in late May 2013. The country’s current account deficit is expected to improve from 2.9 percent of GDP in 2014 to (A more sustainable) 2.5 percent of GDP in 2015.