Uncertain outlook on the Indonesian rupiah

The rupiah performed poor last year and its prospect will remain uncertain in 2013. As trade deficit was the major cause of the currency depreciation, higher export growth is urgently needed to recover the currency. In addition, more inflows of portfolio and FDI should also support the recovery. The central bank faces trade-off between uses its foreign reserves to strengthen the rupiah and the need to maintain the reserves at a secure level.

Indonesia experienced healthy economic growth in 2012, estimated to reach 6.3 percent. However, the rupiah was the worst-performer last year among Asia’s 10 most-active currencies (excluding the Japanese yen). The 5.9 percent rupiah depreciation, according to the market consensus was attributed mainly to concerns over trade deficit. The deficit reached around 2 billion US dollar last year, and the same level is estimated for this year. The shortfall has worsened the current account deficit, which has already been performing poorly for three consecutive quarters. This alarming current account situation largely is attributed to investment growth, which has boosted the imports of capital goods, coupled with high oil imports to feed the soaring consumption of subsidized fuel.

The rupiah continues its weakening trends in early 2013; fell to 9,685 at the end of last week after slumping to 9,785 against the US dollar on 2 January. Meanwhile, the 2013 State Budget requires that the rupiah exchange rate of around 9,300 this year. Fiscal authority (Finance Ministry) have insisted that such a rate is achievable, predicting that Indonesia will continue its fortune as the major foreign investment destinations, flowing the funds from both foreign portfolios and  direct investment. They predicted that investments would become the major engine of growth in 2013, and claimed that Indonesia still had at least 260 trillion rupiah (27 billion US dollar) of FDI in the pipeline. Monetary authority (Bank Indonesia – the central bank) is also confident that the recent deep drop in the rupiah value will end, saying the currency will be stronger in 2013. They echo the same argument that Indonesia will remain a major destination for overseas funds, both in direct and portfolio investments. Hence, from the currency side, going forward, this should result in a stronger rupiah.

In contrast, many economists and analysts in financial markets do not have the same confidence with the authorities. The market consensus believes that any appreciation of the rupiah would only in limited ranges. They expect that the currency would stay at around the level of 9,500 this year. It is true that the FDI and portfolios inflows were substantial, but this does not sufficient to compensate the current account deficit. Meanwhile, the central bank still have serious concern on the risk that any efforts to strengthening the rupiah will use up foreign reserves, which it wants to remain at the secure level. The reserves stood at 112.8 billion US dollar in December 2012, up from 111.3 billion in November, their highest level for six months. It seems that Bank Indonesia would not change its stance that been shown since mid last year when the rupiah was maintained at the level of around 9,650. The bank did not actively pouring the US dollar into the money market (and hence reducing its reserves) to bring back the rupiah to below 9,500. This was proven by the fact that foreign reserves dropped by around 6 billion US dollar in the first half, and then they increased by 6 billion US dollar in the second half of 2012.

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