IO – By mid-May 2018 the Indonesian Rupiah had already depreciated 3.7% since the beginning of the year, fluctuating around 14,000-14,150 / USD. The Government and Bank Indonesia simply put the blame on “global factors” as the cause of the problem. The Fed (the US Central Bank) may bump its interest rate upward 3 times this year, shaking global liquidity. In fact, the actual root of the problem is not just “global factors” but rather the fundamental Indonesian economy. Consider how other Southeast Asian currencies, such as the Malaysian Ringgit or the Thai Baht, recently appreciated 2% and 1.6% (ytd) against the USD.
What indeed has caused the Rupiah to weaken? One factor for sure is that wary investors are unnerved by published data, such as economic growth at only 5%, stagnating in fact over the last 3 years. Even in the first quarter Vietnam could grow 7.3% (YoY), leaving the Indonesian economy far behind: it is expecterd to suffer a Current Account Deficit projected at 2.5-2.7% to GDP this year. Trade balances do not always look good even though we are in the middle of a commodity boom, with oil prices now exceeding 70 USD per barrel.
In April, the Indonesian trade balance showed a deficit of 1.63 billion USD, the largest since 2014. In the first quarter the main contributor to Indonesian exports, growth of Crude Palm Oil (CPO) exports dropped by -15% (YoY). As a net oil importer, Indonesia also faces higher oil and gas prices, with an oil and gas deficit already hitting 8.5 billion USD per year – as the trade balance worsens.
Ring the Alarm
Depreciation of the Rupiah today is totally different from that of 2015. At that time exports became more attractive with depreciation of the national currency: even with a figure of 14,600 / USD in September 2015, the trade balancewas still 1.02 billion USD in the black. Textbook theory posits that when a currency depreciates, exports spurt up as they become more competitive on global market. However, in 2018 when Rupiah depreciates against the dollar, this theory may not be applicable. This time it is totally different.
The Indonesian Central Bank (BI) mantra to defend the Rupiah is to intervene by injecting dollar reserves into the market; this is not always helpful. Since January-April, BI has seen USD 7 billion of its bank reserves evaporate. The last gamble was to increase interest rates. BI has in fact maintained a low interest rate policy for the last two years, terminating it in May of this year. With 25 basis points rising to a 4.25% interest rate (7-day repo rate), the Rupiah soon began to depreciate more deeply. An interest rate policy seems to have kicked in too late to forestall further spiraling downward of our national currency.
Should the Rupiah continue sliding downhill until end-2018, the alarm should go off, revealing that monetary problems can never be solved by BI efforts alone: this is a signal of a looming crisis, more complex than that of 2008. It is not the US that triggered a crisis, nor European countries: it is all in Asia. Credit rating agency Fitch already pointed out how Indonesia banking and corporate debt are the most vulnerable sectors when the USD starts to rise. Those sectors may lead to an economic crisis. Indonesia is already under a yellow signal, says Fitch. Then we we mix in the variable of a trade war between the US and China, instability in the Middle East, following a spike in oil prices, and poor foreign investor apetite to put their money into “election countries”. Investors prefer to wait and see until the Indonesian election results appear in 2019. Does the indicate politics causes investors to avoid Indonesia? Maybe, but we see other factors.
Era of Distrust
The fundamental Indonesian economy is gloomy, not only because of degenerating global conditions or elections, but also by the inconsistency of Govt policy: when it put in place economic packages in 2015 to stimulate industry and exports, there was hope this would deliver meaningful results. The economic packages were full of stimuli, starting with deregulation, cutting investment permit processes, fiscal incentives – even promises to slash gas prices. Investors patiently listened to the mantra of 16 economic packages, but nothing seemed to revive the economy. Economic growth has been stagnant over the last 3 years, at only 5% YoY. In 2017 a number of retailers, including 7-Eleven filed for bankruptcy.
Against this, we point to the international credit rating show as generating unreal optimism. Indonesia was finally awarded “investment grade” from Standard and Poors, then Moody’s and Fitch followed with their upgrades. Even on the international stage, Minister of Finance Sri Mulyani received honors from World Government Summits in UAE and Finance Asia, Hong Kong-based magazines. There is no sense of crisis; it seems the Indonesian economy is sufficiently strong, with such a reputable Minister of Finance.
Investors were not however stupid enough to fall for this. They easily sniff out any miscalculation or PR campaigns in international publications. Soon enough, the moneymen realized Indonesia’s reported economy condition was “too good to be true”. Distrust arose, following the 16 economic packages, hobbled by inconsistent Government policy.
Now we plainly ask “If a crisis befalls us can the Indonesian economy survive”?