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.
