Warning: Rupiah will continue weakening well into 2019

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

IO – From the start of 2018 until the present, the exchange rate of the Rupiah to the US Dollar has continued in just one direction. I perceive the exchange rate continuing to shift downwards until 2019, as a result of our weak economic fundamentals, even though the Government continues to spout the excuse that Rupiah volatility takes place because it is still seeking a new equilibrium point, or because global conditions remain uncertain. The threat that the Rupiah will continue to lose value weaken is linked to other interest rate increases from the Federal Reserve System, the United States’ Central Bank. Our Government also keeps on assuring us that the weakening is temporary, and that the currency will strengthen back up eventually.

I must ask “Are you economists or political rhetoricians?” These are all clichéd excuses. Continued weakening of the exchange rate will worsen inflation rates as time goes by. The price of imported goods will continue to rise.  If the Rupiah continues to weaken, interest rates will also continue to rise, slowing down credit and ending with our inability to make loan repayments.

The Government indeed stated that the exchange rate would not fall below Rp 14,000.00, because that was a “psychological benchmark”. In fact, that limit was easily breached, and our currency has fallen all the way to Rp 15,000.00 per USD. I have analyzed the situation and stated months ago that the Rp 15,000.00 mark would be crossed, and this in fact is what has come to pass. This is not surprising, because the core issues that caused the Rupiah to weaken remain unresolved, and in fact have worsened. Again, I say: the main issue is current transaction deficits. “Current transaction deficit” means that the supply of dollars required to run Indonesia’s transnational economic transactions is insufficient. In fact, the market will read our situation as “Indonesia’s finances are overdrawn”, which will make it even harder to try and earn dollars. The Government projected the deficit to be only USD 23 billion/year, but it has already swollen up to USD 25 billion. In semester 1 of 2018, current transaction deficit was USD 13.7 billion.

With this level of problem, the “cures” the Government provides are highly temporary solutions: one, it intervenes the market by spending USD 10 billion to anchor the interest rate. This is a double-edged sword: this move erodes our currency reserves, but things might even worsen if we don’t intervene. But at the end of the day, this temporary cure will cause even more danger, because it does not resolve the core issue. Two, an equally risky solution proposed by the Government: increasing interest rates. This policy causes Indonesia to lose even more of its competitiveness, as it will burden the business world even more by increasing the amount of interest to be paid on all business debts and transactions. It is a mere temporary cure for the symptoms at the market, like binding a stab wound with gauze without stitching it up. The Rupiah might become temporarily stronger, but it will soon weaken again.

Now, let us review some other important facts: our export growth rate is 5%, and our import growth rate is 6%. Imports require dollars to pay. Exports bring in dollars. And for quite some time now, it is imports that tend to increase. Let me repeat: our imports are bigger than our exports. Any talk about export and imports are related to trade balance. With this situation, our trade balance suffers a deficit. In fact, in July, the Government announced that our trade balance deficit is USD 2.03 billion.

Increasing imports means that the Rupiah exchange rate will become even more depressed. I notice that the Government is making efforts to suppress imports, but this is extremely hard to do. Therefore, this raises income tax. This would however not affect import rates much, because our imports are 75% raw material, 15% capital goods, and only 10% consumer goods. Imports are hard to cut down, I admit…but the Government still makes dubious imports, such as the controversial rice purchases. This eats a sizable chunk of our foreign reserves, yet it continues despite, to my knowledge, the disapproval of the Indonesia Logistics Bureau (Badan Urusan Logistik – “Bulog”) and the Ministry of Agriculture. Still the Ministry of Trade goes on with food imports; what is going on here?

That question aside, we must also look at income sources other than exports. For example, we have portfolio investments. However, the indicator this year is that foreign investors prefer net selling. This means that there will be a large amount of capital outflows. It is ironic, since we want capital inflow but we get capital outflow. Therefore, domestic funds are spent to buy government bonds in order to cover a rapidly-decreasing volume of foreign investment portfolios. This does not bode well, because we only have limited foreign funds to buy bonds – especially with the continued decrease of our foreign reserves due to the attempt to hold up the value of a sagging Rupiah (which has depreciated up to 10% from the start of the year).

Another thing to worry about is that the market notices that we have failed to achieve our 2018 taxation target. I expect that we will have a tax collection deficit of up to Rp 150 trillion. On the other hand, both the Government’s foreign debts (including State-owned Enterprise (Badan Usaha Milik Negara – “BUMN” debts) and private debts, continue to increase. Government debts, both in Dollars and in Rupiah, increase by Rp 1 trillion every day.

The Government’s policy packages have so far proven to be ineffective in resolving the continued weakening of the Rupiah. Any statement it makes that we have no problem whatsoever is mere rhetoric. Therefore, I suggest that the Government generate basic strategies to resolve some of these issues, such as finding the means to produce some of the goods that we import by ourselves. For example, we can utilize our farmers better in order to improve our salt and garlic imports, reducing the imports of these two essential commodities. Continued unnecessary imports will only worsen our current transactions.

Another way to cut down in imports is by reducing infrastructure construction, as they use both imported materials and foreign workers. What will Indonesia gain from that? This is just another burden on our economy, as they must be paid using foreign currency. The Government officials who have been in power for 4 years should have figured out the solution by now. If not, that means that they are incompetent. Failure to resolve the Rupiah issue will only burden the next Government – and our future generations.