Rupiah drop to affect RI only temporarily
The weakening of the rupiah against US dollar will only have a mild and temporary effect on Indonesia’s fiscal system, provided that eurozone countries manage to resolve the crisis in their region, economists say.
The nation’s currency has been under selling pressure recently, touching its lowest level since October 2009 on Thursday at Rp 9,643 per US dollar, as foreign investors cut holdings in Indonesian assets in favor of safer instruments like the US dollar.
A weakening rupiah would impact Indonesia’s capability to pay its debts and import payments, though only on a temporary basis, said Ahmad Erani Yustika, an Institute for Development of Economics and Finance (INDEF) economist.
“Our ability to pay debts might be slightly reduced in the short run, but we are going to be able to utilize declining oil prices as an offset,” Erani said in a telephone interview on Thursday.
“On the import side, the impact of the weakening rupiah will not be significant in the long run, as I predict that the rupiah will recover around June.”
The rupiah’s slide would also not significantly affect the consumer price index (CPI) through imported inflation components, according to Erani. “Our inflation is still mainly driven by fuel prices and food commodity prices, not by imports.”
Standard Chartered Bank Indonesia senior economist Fauzi Ichsan said that the decreasing price of global raw material commodities would also help to cushion the impact of the weakening rupiah on imports.
“We have been seeing a trend of declining raw material prices. So, in spite of the fact that rupiah weakens against the dollar, the amount of dollars that importers spent will also decrease,” he added.
Fauzi also said that the government would be able to maintain its capability to pay its debt due to the potential increase in dollar revenues from gas exports. In recent months, the government has been trying to renegotiate gas export contracts for better prices with gas importing countries, such as China.
The economists agreed that despite the weakened rupiah, the country’s overall fiscal performance would remain healthy and deficits would be maintained at an acceptable level of below 3 percent.
Nevertheless, Erani noted that the government needed to keep a close eye on developments in eurozone countries, the epicenter of the current global crisis.
“The decision on Greece will be the main key for the future of the global economy,” Erani said.
Fears reemerged that global economic recovery might stall on a potential Greek euro exit, Spanish banking crisis, as well as an economic slowdown in China and India. China is one of Indonesia’s largest trading partners.
Finance Minister Agus Martowardojo said here Thursday that the government would try to be as efficient and effective as possible in managing its finances to brace for the worst and to survive the potentially destructive future economic storm.
“We will only pursue productive spending and if we want to look for loans or financing, we are going to make sure that those financing plans will be used for beneficial purposes and will therefore maintain our deficit rate,” Agus added.