Friday, March 29, 2024 | 00:51 WIB

US BANKING WOES
Momentum to strengthen the Rupiah

READ MORE

USD
(Source: BAREKSA)

However, while Indonesian banks’ balance sheets are healthy enough to weather the shock, as a developing country amid global uncertainty Indonesia must be able to battle the rise of global sentiments against its economy. Sometimes they are not directly related to the underlying fundamentals, but because they spread like wildfire, they have to be handled quickly and properly through a precise and coherent communication strategy. Submission of the latest data and communicating it to the public in a transparent manner can help calm the market. 

Of course, the determinants of Rupiah stability do not only come down to the ability to maintain bank performance and reduce negative sentiment through transparency and clarity in public policy communication. Other factors such as price stability, a well-developed capital market and adequate foreign exchange reserves need to be maintained properly. As of February, inflation in Indonesia stood at 5.47 percent, below BI benchmark interest rate (BI7DRR) of 5.75 percent. This illustrates that bank interest rates are still attractive to depositors. This is in contrast to the situation in the US, where there is a negative spread between the Fed’s rate and the US inflation rate. 

Unfortunately, the current inflation rate is still above BI target of 3±1 percent. It takes extra efforts from relevant authorities to ensure that the inflation target for 2023 can be reached. This means that Rupiah stability can only be sustained when the inflation rate is kept under control. This way, BI will not see the need to raise its reference rate in an aggressive manner. However, if inflation remains persistently high, BI may be “forced” to enact further rate hikes. 

On the one hand, the increase in benchmark interest rate will generally strengthen the Rupiah, because the “hot funds” will remain parked in the domestic financial market, but on the other hand it will put pressure on the real sector, sending a negative signal to the capital market. In the end, the Rupiah is liable to become more volatile as the real sector’s potential to expand is constrained. 

Another factor that should be taken into account is the dynamics of the Indonesian capital market as reflected in the Indonesian Composite Index (IHSG). Dramatic fluctuations in IHSG will disrupt efforts to strengthen the Rupiah. What’s more, IHDG movement is often driven more by global sentiment than economic fundamentals. 

The third factor is the position of Indonesia’s foreign exchange reserves, which as of February amounted to US$140.3 billion. This is strong capital to maintain market confidence, especially with regard to Rupiah stability. In addition to giving reassurance to investors, it will also strengthen the credibility of BI’s exchange rate management and macroeconomic policy. 

Eko Listiyanto SE, MSE
Eko Listiyanto SE, MSE earned a bachelor’s degree in economics and development studies from Brawijaya University, Malang. He holds a master’s degree in economics from University of Indonesia (UI). He is currently the deputy director of the Institute for Development of Economics and Finance (INDEF), a Jakarta-based independent research institution in economics and finance. He is a prolific author of economic articles in various mass media. Eko was member of the Manpower, Human Resources and Research & Technology team of the National Economic and Industry Committee (KEIN) from 2015-2019, as well as an analyst at Bank Indonesia Supervision Board (BSBI) from 2013- 2017.

Strategy to keep Rupiah below Rp15,000 

US bank collapses have shaken the global financial markets. However, they will also send a message to the Fed to pay more attention to the impact of its benchmark interest rate policy going forward, especially on the US banking sector. As a result, the Fed is expected to moderate its stance. A hike of 0.25 percent will signal that the US central bank remains focused on its strategy to rein in inflation. 

Read: Takeaways from the sixth Quad ministerial hosted by India

The shift of the Fed’s stance from aggressive to moderate will provide relief to developing countries so they can focus more on spurring economic growth. This means that the dollar index, which represents the strength of the US dollar against a number of major currencies, is likely to decline. At this point, developing countries do not always have to keep up with the US benchmark interest rate. This momentum needs to be optimized by Indonesia. When our Rupiah becomes more stable, measures to accelerate the economy can be carried out more optimally. Thus, when the time comes for The Fed to normalize its rate again, Indonesia will already have more cushions to absorb the shocks. 

It is still possible to bring the Rupiah exchange rate back to below Rp15,000 per US Dollar. But first inflation needs to be lowered so depositors do not suffered losses if they put their funds in banks. Address the negative sentiments around global economic uncertainty, especially in the banking sector, through swift, transparent and clear communication of the banking sector resilience, backed up by the latest data. Last but not least, maintain adequate foreign exchange reserves to inspire investor confidence in the stability of the Rupiah. These three measures, coupled with the 34 consecutive months of trade surplus, are the ammunition BI and the government can load to bring Rupiah down to below Rp15,000 against the greenback. (Eko Listiyanto)

POPULAR

Terrorism in Palestine

The Museum on Fire…

Latest article

Related Articles

INFRAME

SOCIAL CULTURE