Rupiah will continue to weaken

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

IO – I have warned and written many times that Rupiah will to continue to weaken throughout 2018. There may be times when Rupiah seems to strengthen, but this will be a temporary condition, and then it will weaken again. If you draw a straight line across a long-term graph, Rupiah movement will continue to weaken.

Rupiah will only strengthen temporarily if interest rates are increased, when the US Dollar happens to be weak due to some factor unrelated to Indonesia’s economy, because Bank Indonesia intervenes with the capital market, etc. However, all of these “Viagras” do not come without a risk. Increasing interest rates will burden our economy and make it harder for our country to compete with other countries. Foreign currency intervention will eat into our continuously draining reserves.

In economic terms, core cause of the weakening of the Rupiah is the supply or entry of USD into Indonesia’s economy is much smaller than USD demand or need. Indonesia’s current transaction deficit this year is estimated at USD 25 billion. In other words, we spend much more dollars than what we earn. This deficit is what cause Rupiah to weaken against the USD.

We all should stop confusing ourselves about the causes of the fall and putting the blame on global economic conditions and other external causes. The current transaction deficit occurs because our Trade Balance (exports minus imports of traded goods) is at a deficit. Our Service Transaction Balance is in a similar deficit. The Government tries to cover this foreign currency deficit in many ways, such as attracting foreign currency debts or other types of hot money. This is not a healthy way, and it even might cause us to fall even deeper.  The Government must focus on the effort to increase dollar supply by increasing exports and decreasing imports.

Weak economic fundamentals are followed with State Budget deficits. So practically, the Indonesian economy is running in a deficit in all directions. Private and Governmental foreign currency debts (especially State-owned Enterprise debts) continue to rise sharply. Creditors are getting worried that it would be difficult for Indonesia to repay its debts – or it might even fail to repay altogether.

On the other hand, the market sees how Indonesia’s economy is highly dependent on imported goods, especially food and energy. This inevitably needs foreign currencies. If we really want to see just how weak our State Budget is and how bad is our dependence on imports (which means that we desperately need foreign currencies), I have two very simple questions that serve as a test instrument:

  1. Can our State Budget continue if the Government does not pull in new debts within…say, just the next 2-3 months? (I personally believe that our Government, or our State Budget, will collapse without new debts.)
  2. Are we able to stop importing wheat, which is the de facto replacement of food as primary foodstuff? (I personally think that the people will starve over this condition. Also, it is very unlikely that the Government will be able to stop meat, grain, and soy imports, because this will upset the people, and all these imports require dollars for payment.)

What about the economic independence that Jokowi’s Government promised us, then? I think that all indicators show a contrary condition, especially since the Government is aggressively issuing various “populist” policies in order to win the 2019 Elections. The State Budget is wasted just to gain national and international popularity. Extravagant events such as hosting the annual IMF-World Bank Convention needs to be stopped, or at least delayed. However, that’s rather unlikely! That’s the fun in being an incumbent I suppose – he can campaign legally using the State’s funds, leaving the future Government and the next generation to deal with the consequences.