What If Rupiah Goes from Bad to Worst? and How Low It'll be?
written on 21st of November 2018
The depreciation value of rupiah against the US dollar has been down to Rp 14,490, reaching its lowest level on Tuesday, 6 September 2018 since the last two-decade. Rupiah cannot resist the strength of dollar for the time being as The Fed tightening its monetary policy by increasing The Fed Fund Rates, making dollar as a favourite safe haven asset.
The currency rates was going worst compared to the level at the beginning of the year when Rupiah at Rp 13,300 – Rp 13,400 per US dollar. Moreover, the current Rupiah level has been out of the assumptions rates in the 2018 state budget, which predicted the maximum exchange rates at Rp 13,400 per US dollar on average this year. This situation led to the comparison to the catastrophic depreciation on rupiah-dollar exchange rates level in 1998, when the financial crisis happened.
Here’s the facts behind Rupiah depreciation:
Why does the rupiah depreciate in value?
There are two factor behind the rupiah depreciation. First, from the external side, as mentioned before, the gradual increases of The Fed’s interest rates has been the main factor of the weakening of rupiah. Not only rupiah, but also the currency of some emerging countries. The Fed tightening policy is a kind of prevention to manage an inflation. It is important for the Central Bank to do so since the macroeconomic data of The US shows positive results. If the interest rates weren’t be increased, there would be high inflation in US. On the other hand, the Fed policy has made a big capital flows from the emerging markets to the US market, since the investors always look for the higher returns. Certainly, it makes the currencies of the emerging market fall deeply.
From the internal side, the widening of the current account deficit makes the foreign investors doubt the economic fundamental of Indonesia. The CAD has widened to $8 billion on the second quarter of this year, which is equal to 3% deficit from Indonesia Gross Domestic Product. However, the deficit is still at the safe level according to BI. In a simple word, CAD shows that the capital outflows are higher than that of the capital inflows of a country in terms of foreign exchange liquidity. CAD is one of the biggest shortcoming to the Indonesian economy despite the positive and sustained economic growth in the last 5 years.
Is the recent situation comparable with the financial crisis in 1998?
Compared to the financial situation ten years ago when rupiah fells 254% yoy in September 1998, the recent situation tells a better story. If the recent rupiah depreciation was calculated using the 1998 rates, this currency should be trading at Rp 47,421 per US dollars. Furthermore, many data shows that Indonesia has a far better economic fundamentals than that in 1998.
For example, the foreign exchange reverse has value at $118.3 billion in July 2018 in contrast to $23.61 billion in 1998. The inflation was noted at 3.2% yoy in August, which is under the government’s target and in contrast to the 78.2% inflation in 1998. In the meantime, the GDP has a far better performance at 5.27% expansion during the second quarter this year, while the economy contracted by 13.34% in 1998.
What are the regulator policies to resolve the rupiah’s demise?
Bank Indonesia has been trying to maintain rupiah stability by tightening its moneter policies. The central bank has increased its interest rates by 125 bps to 5.5 percent by September. BI has been also applying the dual intervention policy by intervening the foreign exchange and secondary bonds market. Moreover, BI is trying to fix the current deficit account by increasing import tax of certain goods and also expanding the use of B20 (20% Blended Biodiesel) to the public sector.
What’s on the line if the rupiah keeps weakening?
Simply saying, on the one hand the depreciation of currency always leads to the increasing of the imported goods price. Also, the companies or producers that rely on imported raw materials, such as pharmacist industries, certainly are being hit by this currency depreciation. On the other hand, the depreciation value of rupiah do exporters good as their products become more competitive.
References
Q&A: How low can the rupiah go?.Marchio Irfan Gorbiano.The Jakarta Post.6/9/18
pic: emAji Pixabay
https://pixabay.com/id/photos/uang-rupiah-gaji-ekonomi-keuangan-3431775/
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