The Volatile Rupiah and Indonesian Economic Stability in Early 2014

Indonesian Economic Stability in 2014

The Bank of Indonesia will continue to maintain the stability of the exchange rate, or at least minimize volatility, to support controlled economic growth.

In early 2014, the rupiah had climbed to 12,110 per US dollar, after the end of 2013 recorded an exchange rate that had depreciated by 5.77 % (mtm) to Rp. 11,963 per U.S. dollar. Based on market research and analysis, the depreciation was mainly triggered by the market’s negative sentiment regarding the planned reduction of U.S. monetary stimulus (easing) as well as the effect of Indonesia’s account deficit.

The effect of fluctuations in the exchange rate against the dollar on international trade can be seen from the side of demand and supply. On the demand side, while the rupiah weakened demand for domestic goods, and export will rise. On the supply side, the decline in the value of the rupiah resulted in an increase in imports of raw materials.

Production output will be down and ultimately will lead to inflation. This contributes to a decline in the volume of international trade transactions, which affects the balance of trade. These conditions are often utilized by investors to take profits through speculation.

Misleading moves by speculators to make a profit should be anticipated. A number of money changers (currency exchanges) should continue to be monitored. Do not let speculators exaggerate the issue that the U.S. dollar is not in the market because they it is overpriced.

Based on an Indonesia market survey, the weakening rupiah is in line with other regional currencies. This week, the dollar is in the BI middle rate of Rp. 12,025  up from Rp. 12,005 per U.S. dollar. Accordingly, the Bank of Indonesia said the exchange rate in January 2014 is still under pressure from a reduction of activity in the foreign exchange market at the end of the previous year.

The effects of the exchange decrease rate on stock sector include:

• Investors hesitant to invest because the USD has high value against the rupiah.

• Performance Stock Exchange plummeted as a result of the rapid upheaval.

• Share prices decline in the stock price index.

In addition to the stock sector, exchange rate instability also has a negative impact on the Indonesian economy. For example, during the 1998 economic crisis, instability and even collapses occurred over the exchange rate in the foreign exchange market and made food prices rise, and ultimately caused inflation in Indonesia to continue creeping up.

Based on the research results of Indonesian market research, rupiah volatility in the global banking market increased. In early January, the rupiah closed up,  as the U.S. dollar weakened against a basket of major currencies. Increased bonds yields have contributed to the negativity about the value of the rupiah. Market participants have concerns over emerging market currencies against which the movement of the U.S. dollar was higher, as a result of sentiment about the FOMC session. This is true not only about dollars, but also about the weakening impact of other emerging market currencies.

Inflation in the first week of January 2014 was recorded at 0.77 percent month over month, and 8.1 percent year over year. The figure was based on a survey conducted by The Bank of Indonesia. The Central Statistics Agency (BPS) recorded an inflation rate of 0.55 percent in December 2013. The annual inflation rate reached 8.38 percent. The Bank of Indonesia decided to keep the benchmark interest rate (BI rate) at the level of 7.5 percent. Interest rate lending ease and the deposit ease remained respectively 5.75 percent and 7.5 percent. The policy is considered consistent with efforts directed toward an inflation target of 3.5 to 5.5 percent in 2014, as well as control of the current account deficit to a healthier and more sustainable level. The increase in the BI rate is influenced by many things, not just domestic growth factors and inflation, but also external factors, which greatly affect the BI rate. External factors such as weakening economic growth and the depreciation of the rupiah against the U.S. dollar should also be anticipated.

What is the prediction of the rupiah against the US dollar for the coming month?

The fate of the rupiah against the U.S. dollar (U.S.) in 2014 will probably be better than last year. A relatively controlled inflation rate in is a positive sign and a positive rupiah would lead to a new equilibrium level. National Economic Committee (KEN) estimates the exchange rate against the U.S. dollar will be in the range of 10,500 to 11,500 per U.S. dollar. The easing policy is necessary because the foundation of the U.S. economic recovery is getting better. Furthermore, this condition will stimulate the global economy to improve. Additionally, the U.S. is still the main engine of the world economy. Investors will be looking for opportunities that provide higher yields. Indonesia remains a country with the highest growth prospects because there are considerable opportunities for capital flow into the country.