The Rupiah: what is behind its temporary strength

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Gede Sandra Bung Karno University Economic Analyst seriousness and comprehensive efforts to accelerate the fulfilment of MEF. For example, they have reevaluated defense cooperation contracts that were deemed ineffi- cient, opened up window of cooper- ation with various countries so that we are not dependent on a single country, and lastly, they have also strived to beef up the national de- fense industry. So, the steps taken by the Defense Ministry have been no less comprehensive. We urgent- ly need to make key breakthroughs to have a strong national defense system in less the time it would normally take. Other than the things I have mentioned above, I concur that this grand plan certainly still has to be refined and finalized together with the Parliament.

IO – There is nothing special about the recent strengthening of the Rupiah exchange rate against the US Dollar. Rupiah volatility merely follows a global trend, as the United States Dollar (USD) has weakened against top global currencies, including the Euro (EUR), Great Britain Pound Sterling (GBP), Australian Dollar (AUD) and Singaporean Dollar (SGD), in the past month. The increasing heat of US internal politics tracking racial and human rights issues represented by “Black Lives Matter” within the past month has also had the effect of weakening the USD against the currencies of ASEAN countries (apart from Singapore), such as the Malaysian Ringgit (MYR), Thailand Baht (THB), and even the Philippine Peso (PHP). 

The Rupiah’s recent strength is also a result of the financial “doping” of USD debts taken up by the Ministry of Finance and State- Owned Enterprises (“SOEs”) within the past two months. The Ministry has issued IDR 420.8 trillion worth of Government Bonds up to May 2020, including USD 4.3 billion of global bonds, issued in April 2020. In May 2020, four SOEs are known to be preparing to issue USD 5.6 billion in global bonds. In other words, global bonds issued by the Ministry and SOE are going to total USD 10.9 billion (or IDR 162 trillion according to the April 2020 exchange rate of IDR 14,900.00/ USD). Issuing such high interest Bonds (1.5%-2% higher than those of the Philippines and Vietnam) is highly unfair and promises to become a “financial time bomb”, as the steep interest will burden our State Budget in future times. 

Another significant pillar of support for our currency’s exchange rate comes from Bank Indonesia. The Central Bank purchased IDR 166.2 trillion worth of Government Bonds released by foreign owners in secondary markets in April 2020, as part of BI’s total stimulus of IDR 503 trillion meant to maintain the stability of our national financial system amid the recession caused by the Corona pandemic. 

However, such “strengthening” of the Rupiah is clearly only going to work on a temporary basis. Fundamental external economic indicators, ones that actually maintain the strength of a nation’s currency, i.e. Trade Balance, Current Transaction, and Balance of Payments (“BOP”) remain in deficit. Statistics Indonesia (Badan Pusat Statistik – “BPS”) recorded Indonesia’s exports in April 2020 at USD 12.19 billion, a drop of 13.3% from the March 2020 figure and 7% off that of April 2019. National imports in April stood at USD 12.54 billion, a drop of 6.1% against those of the previous month. Indonesia’s trade balance deficit in April 2020 stands at USD 350 million. Current Transactions in Quarter I of 2020 (Jan-Mar) remain USD 3.9 billion in deficit, while BOP at the same period is also in deficit, at USD 8.5 billion (a horrible crash from the time BOP was in a USD 2.4 billion surplus, over the same period in 2019). 

To repeat: we conclude that the current strengthening of the Rupiah is only a “temporary fix”, as it is only part of a global trend of weakening US Dollar supported by artificial “financial doping” from the Ministry of Finance, SOEs, and BI. When the market finally becomes aware that Indonesia’s economic fundaments are pitifully weak, a condition that is expected to endure until the end of the year, the trend will reverse itself.