Dollar exchange rate steadily spirals towards Rp 16,000.00

DR. Fuad Bawazier, MA
Economist and Former Finance Minister in Cabinet Development VII

IO – In January 2018, the Rupiah ex­change rate against the United States dollar (USD) remained around a Rp 13,200 range. In May, the rate ex­ceeded Rp 14,000.00, and now (Oc­tober) it is at Rp 15,200.00. In other words, the Rupiah has weakened about Rp 2,000.00.

Unfortunately, the factors that cause the weakening of the Rupiah remain extant, and have even wors­ened. These include decreased dol­lar supply in Indonesia’s economy, while demand for dollars continues to strengthen, creating an even big­ger gap or deficit. On the other hand, none of the “cures” (policies) effect­ed by the Government so far have proved effective. In fact, they tend to worsen the Indonesian economy.

In order to maintain the Rupiah exchange rate, Bank Indonesia (BI) has intervened in the foreign ex­change market. This intervention has drained off about USD 10 billion of our foreign reserves. Other than further stimulating foreign exchange speculators in their money games, such interventions that reduce for­eign reserves also further damages market trust.

Maintaining the Rupiah exchange rate by increasing the interest rate has so far reduced Indonesia’s com­petitiveness and economic growth. It is ineffective, as it is only able to calm market volatility for a short time without resolving the main issue, i.e. dollar shortages in the market. In fact, the dollar deficit is increasing, as shown by the increasing trade balance deficit from estimates at the start of the year.

Import growth through the end of 2019 is expected to remain high­er than export growth, i.e. in 2019 imports will grow 7.1% while exports will only grow 6.3%.

This means that our trade bal­ance deficit, as well as Current Ac­count Deficit (CAD), will increase. Initially, CAD was projected to be at most 2.4% of GDP. In view of the data existing until September 2018, Minister of Finance Sri Mulyani is fi­nally forced to admit that CAD will exceed 3% of GDP. With Indonesia’s GDP at USD 1 trillion, meaning that CAD will be in deficit more than USD 30 billion.

A CAD deficit exceeding 3% along with State Budget deficits has shak­en the economy in Italy. Indonesia’s financial situation is actually facing the same specter. Meanwhile, the Indonesian foreign exchange market suffers from negative sentiments that further weaken the Rupiah:

First, our foreign exchange short-term debts total USD 50 billion. This means that the foreign exchange market will be fighting for dollars.

Second, the incoming funds for portfolio investments into develop­ing countries will decline by USD 70 billion within the next two years. This will be detrimental to Indonesia, which has been a main beneficiary of such hot money funds since 2010.

Third, portfolio values in the glob­al market will shrink, which means that it will be harder for both Gov­ernment and private parties to issue bonds. Again, Indonesia, as a main beneficiary of global hot money, will find it more difficult to sell more bonds. Furthermore, it has to pay out a lot of interest on its existing bonds, as the yield rate of Govern­ment bonds has exceeded 8%.

Fourth, investments in the global market are predicted to be delayed, due to scarce capital and high inter­est rate.

Fifth, weakening interest in Gov­ernment bonds pushes their price down and yield up.

Sixth, the portion of Govern­ment bond foreign ownership de­creased from 39.82% (early 2018) to 36.89% (end of September 2018), even though its nominal value (net) within the past 9 months increased nearly Rp 15 trillion. Naturally, this absolute increase means nothing in comparison with the increase of State debt, by Rp 1 trillion a day. Foreign in­vestors are clearly leaving Indonesia. Foreign media (CNBC Indonesia and Reuters) interpret this as Indonesia having increasingly poor economic prospects.

Seventh, world petroleum fuel prices (for example Brent oil), have increased up to USD 80.00 per barrel, while the 2019 State Bud­get Plan estimated the price at USD 68.70 per barrel. Similarly, the Ru­piah exchange rate was estimated to be Rp 14,400.00, but it is now Rp 15,200.00. Other macro-related as­sumptions in the calculation of 2019 State Budget Plan are expected to miss as well, making it even harder to achieve targets in the Plan. The tax income target for the 2018 will prob­ably not be achieved, even though not as badly as in the past few years. However, it is still a concern for hold­ers of Indonesian Government bond holders as to whether the Govern­ment will be able to repay principal and interest.

Eighth, last but not least, with the improvement of the United States economy, the Fed is probably going to increase the dollar interest rate to a reference rate of 3.25%. This would further strengthen the USD and pull the dollar back home, exiting devel­oping country markets like that of Indonesia. This is already felt with the occurrence of capital outflows from our capital market. This is bad for us, as this hot money investment has been helping to strengthen our foreign reserves.

The above indications and facts show that would ceteris paribus our Rupiah exchange rate will continue to weaken until a new psychological threshold of Rp 16,000.00. When we have reached this figure, the for­eign exchange market would be even harder to control, leaving dollar hold­ers as the winner of great profits and benefits. The ball is now in the Gov­ernment and BI’s courts – may they be able to handle it.