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Further rupiah slip could be 'dangerous'
Bank Indonesia has been warned by analysts and business stakeholders over its âdangerousâ strategy of tolerating a weaker currency after the rupiah weakened to below the psychological barrier of 13,000 to the US dollar
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B
ank Indonesia has been warned by analysts and business stakeholders over its 'dangerous' strategy of tolerating a weaker currency after the rupiah weakened to below the psychological barrier of 13,000 to the US dollar.
The rupiah depreciated 0.4 percent on Thursday to trade at 13,022 against the greenback, according to the Jakarta Interbank Spot Dollar Rate (JISDOR), as growing concerns over China's economic slowdown clouded the outlook on Indonesia's exports and potential improvement in its current-account deficit.
During the trading session, the rupiah plunged to a level unseen since the 1998 Asian financial crisis, or 13,030 per dollar, according to currency rates compiled by Bloomberg. It closed the trading day at 12,989 on speculation of intervention from Bank Indonesia (BI).
BI senior deputy governor Mirza Adityaswara said on Thursday that the rupiah's weakening was driven by external factors affecting investor sentiment in emerging economies, notably the recent interest-rate hikes in Ukraine and economic slowdown in China.
Chinese Premier Li Keqiang has said that his country would aim for economic expansion of only 7 percent this year, the lowest target in more than 15 years, and lower than last year's target of 7.5 percent.
China is Indonesia's largest export-import partner. The International Monetary Fund has estimated that every 1 percent deduction in economic growth in China could decelerate the Indonesian economy by up to 0.5 percent, mainly because of the strong trade links between the two countries.
'Countries that rely heavily on China for their exports are affected by the negative sentiment,' Mirza said, adding that BI would remain in the market to ensure adequate forex supply and reduce rupiah volatility.
The BI executive also argued that the rupiah's weakness this year would not negatively affect the fiscal balance, given the significant reduction in spending on fuel subsidies, which in the past was sensitive to the currency's fluctuation against the US dollar.
The rupiah has fallen by more than 4.6 percent this year, among the worst performers in Asia, a contrasting performance compared to a 4.3 percent surge in the Jakarta Composite Index (JCI).
So far, BI executives have signaled their preference for a weaker rupiah, arguing that a somewhat undervalued currency might be needed to boost exports and rein in imports, eventually improving Indonesia's trading competitiveness.
Risk of further rupiah depreciation could be 'the biggest threat to foreign investors in Indonesian equities', Mandiri Sekuritas equity strategist John D. Rachmat warned his clients in a research note released on Thursday.
'It is dangerous for Indonesia to pursue a weaker currency,' said one analyst who spoke on condition of anonymity.
'The swing would be large if there is a lack of an in-depth domestic forex market,' the analyst cautioned. 'The central bank still needs to put financial stability ahead of trade competitiveness.'
Indonesian Employers Association (Apindo) chairman Hariyadi Sukamdani said Thursday that a weak rupiah spelled more trouble than advantages for businesses.
This is because many businesspeople, including those in the export-oriented industry, will see their costs skyrocket because of the high import content in their manufactured goods, Hariyadi said.
