“Pep pills” for the Rupiah: How long can this go on?

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Anthony Budiawan Managing Director of Political Economy and Policy Studies (PEPS)

IO, Jakarta – Since it took a tumble last year, the Rupiah exchange rate has made up for its loss this year, sitting at a rate of Rp 14,100.00 per USD as of the end of last week, even lower than the Rp 15,200.00 per USD it recorded in October of last year. Such an improvement in the exchange rate is a “wonder” for many, as it took place amid a troubled economic environment, i.e. 2019 exports and imports being worse than those of 2018. As of the end of September 2019, exports have sunk USD 10.8 billion and imports are down USD 12.7 billion. The overall trade balance for January-September 2019 remains in a large deficit of USD 1.9 billion. This means that Indonesian businessmen must somehow scrounge up USD 1.9 billion to cover trade debt payments to foreign businessmen.

The trade balance is a component of our current transaction balance. The total January-September 2019 deficit current transaction balance is USD 22.55 billion. This means that our dollar reserves are being drained by that amount during the period, and the Rupiah exchange rate should have weakened because the dollar has in fact strengthened. A USD 22.55 billion deficit is an extreme level and should logically have caused the Rupiah exchange rate to crash.

On the contrary, the Rupiah exchange rate remains serenely stable. In fact, the exchange rate has strengthened, as if the currency has actually become more popular, responding to a strengthened economy. However, it turns out that the putative “improvement” is in fact the result of a large influx of dollar investments in our country, mostly consisting of foreign purchases of Government bonds. As of September 2019, the total value of Government (newly-issued) bonds purchased by foreign investors totals USD 10.47 billion. Meanwhil, foreign reserves for the first nine months of 2019 only rose USD 3.68 billion. In other words, without the cover of the USD 10.47 billion increase in national debt, our foreign reserves would show a USD 6.79 billion deficit. If this should happen, the Rupiah exchange rate would crash as well. 

Therefore, the Government must continuously issue new bonds, simply to shore up the drooping Rupiah: they have to shovel dollars into the Indonesian treasury to ensure that our massive current transaction deficit is covered, to maintain our foreign reserves from crashing, and naturally to keep the Rupiah exchange rate from diving in turn. The Rupiah gets “doped” from new Government bonds that are set much higher than what they should have been (i.e. just to fund State finances). 

In 2014-2018, the excess in national debt (alias “State financial doping”) was IDR 134.87 trillion, with a deficit of IDR 1,443.95 trillion and rising national debt of IDR 1,578.82 trillion. State Budget Surplus (Sisa Lebih Pembiayaan Anggaran – “SiLPA”) was 9.34% of the total State Budget deficit. This large amount of debt taken on simply to shore up foreign reserves truly shows how our country is wasteful with its money.

Like any other kind of doping, the dosage of our State financial doping must be increased with each infusion, in order for it to remain effective. The SiLPA doping in 2014 was only IDR 22.2 trillion, or 9.79% of the 2014 State Budget deficit at IDR 226.69 trillion. The dosage increased in 2018 to IDR 36.25 trillion, or 13.45% of the 2018 State Budget deficit at IDR 269,44 trillion. In 2019, the doping had to be pumped even more, and more than once: In September 2019, the State Budget Surplus from debt was IDR 55.26 trillion, equal to 21.9% of the State Budget deficit for January-September 2019 at IDR 252.37 trillion. By October 2019, the State Budget Surplus from debt increased again, to IDR 84.31 trillion, equal to 29.17% of the January-October 2019 State Budget deficit at IDR 289.06 trillion. In other words, State Budget deficit just in October 2019 was IDR 36.69 trillion, while the national debt incurred was IDR 65.74 trillion. This means that we have a SiLPA, which is used for doping the Rupiah by puffing up foreign reserves by IDR 29.05 trillion, or 79.18% of the October 2019 State Budget deficit.

This abnormal condition is exacerbated by our muted tax income ratio which, as of September 2019, has dried up to a mere 9.03%, and is expected to drop even further to a low 9% figure in October. Consequently, desperate further dosages of financial doping are required. The question is, “How long can this kind of “doping by debt” go on?”

Won’t this result in a fatal overdose at some point?