Indonesian Rupiah Shows Signs of Recovery After Steep Declines

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The Indonesia rupiah has stabilized after hitting its lowest point since the 1997-98 Asian Financial Crisis.  The currency had fallen to a low of 12,930 rupiah/US dollar on Tuesday morning but later strengthened to close at 12,680.  The rupiah made further gains on Wednesday by growing 0.2 percent to 12,658, according to local exchange rates published by Bloomberg.  The Jakarta Composite Index (JCI), the main price barometer of the local stock exchange, also rose 0.2 percent, partially reversing a 1.9 percent fall on Tuesday.

The rupiah’s stabilization occurred due to the actions of Indonesia’s central bank. The bank intervened by using its foreign reserves of US dollars and by buying government bonds on the secondary market to support the currency. The Deputy Governor of Bank Indonesia, Perry Warjiyo, told reporters that the bank bought another Rp 200 billion (US$16 million) of debt on December 16, adding to its initial purchase of Rp 1.5 trillion.

Bank Indonesia (BI) has been active recently in using its foreign reserves to defend the currency – as a result, the bank’s foreign exchange reserves dropped by US$900 million in November. BI Senior Deputy Governor, Mirza Adityaswara, has stated that the central bank is comfortable with a rupiah level of between 11,900 and 12,300. This could indicate more action may be forthcoming in the future in order to ensure the currency stays within that range.

Reasons for Currency Decline

Analysts attributed the initial fall in the country’s currency to portfolio outflows from Indonesian assets and year-end corporate demand for dollars. Data from BI showed that at least Rp 17 trillion (US$1.3 billion) in foreign funds were pulled out from Indonesia’s equity and bonds markets in December as fund managers repositioned their riskier assets in emerging countries.

The depreciation of the rupiah was part of a larger trend of investors withdrawing money from emerging markets last week. Last week, investors withdrew more than US$2.5 billion from U.S. exchange-traded funds (ETFs) that buy emerging-market stocks and bonds, which is the biggest outflow since January. In addition, Turkey’s lira and South Africa’s rand fell 3.3 percent and 1.4 percent respectively at the same time as the rupiah.

The drop in the Russian ruble has also helped to cause the drop in the rupiah since it has decreased trust in emerging markets and increased the risk aversion of investors. The actions by Russia’s central bank have caused great volatility in global markets; the bank raised its key interest rate from 10.5 percent to 17 percent on Monday in a bid to prevent its own currency from further depreciating.

Another factor influencing the depreciation of the rupiah has been the structural economic recovery of the United States, which is predicted to lead to an announcement of higher US interest rates at the Federal Open market Committee (FOMC). This sort of action generally coincides with some movement of money out of emerging markets and into the US.

Opportunity for Investors and Indonesia

There are some indications that the current situation with the rupiah is only temporary.  Indonesia’s economic fundamentals appear to be strong and a weaker currency could help decrease the country’s current account deficit as its exports become cheaper. The country’s current account deficit is a major worry among investors, but the cheaper currency should help it fall to three percent of GDP in the fourth quarter of this year, which is an improvement on last year’s 3.3 percent.

Bank of America Merrill Lynch has reassured investors that there are no particular domestic factors that justify the rupiah’s current weakness. In addition, Morgan Stanley analyst Geoffrey Kendrick has said the decline defied market logic and could present an opportunity for investors in the country.

Indonesian President Joko Widodo has said that the rupiah’s fall against the US dollar could be an opportunity for the local industry to boost exports. The president also indicated that the country’s export-oriented companies could be given incentives to take advantage of the opportunities that a cheaper currency provides.

Indonesian Vice President Jusuf Kalla has made similar comments by saying, “It will bring economic stability because the deficit in the trade and current account will decrease”. He also noted that a recent reduced fuel subsidy policy could start to show gains as funds are transferred from consumption to production.

The cheaper rupiah could also encourage foreign investment into Indonesia since the currency may now be undervalued. Unlike during the financial crisis in 1997-98, the country’s political system is more stable and the country has the strong foreign exchange reserves needed to defend the currency.

On Thursday, the rupiah showed further signs of strengthening with a 1.2 percent increase, trading at 12,565 rupiah/US dollar. This could indicate that the fall is indeed temporary and the currency will begin to appreciate in the future.

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email asean@dezshira.com or visit www.dezshira.com.

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