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Indonesia not engaged in 'currency war': BI
Bank Indonesia (BI) is not engaged in the currency war that is expected to soon escalate in global financial markets following Chinaâs decision to devalue its currency, the central bankâs executives have said
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ank Indonesia (BI) is not engaged in the currency war that is expected to soon escalate in global financial markets following China's decision to devalue its currency, the central bank's executives have said.
BI Governor Agus Martowardojo said Wednesday that the recent depreciation of the rupiah, which plunged further Wednesday to this year's low was way too deep and its movement had actually 'overshot' its fundamentals.
The central bank would continue intervening in the market to support the rupiah, which was now trading at an undervalued rate, the BI governor stated.
On Wednesday, the rupiah fell by 1.4 percent to close at 13,788 per dollar, the worst performer in the Asia-Pacific currency rates compiled by Bloomberg. The Indonesian currency touched 13,831 in the afternoon trading session, the weakest level in 17 years since the 1998 Asian financial crisis.
'The rupiah rate now is already competitive, already undervalued, so there is no need for us to perform a [deliberate] currency depreciation,' BI senior deputy governor Mirza Adityaswara wrote in a text message.
China, the world's second-largest economy and the largest export market, triggered a rout in the equity and currency markets this week after it unexpectedly devalued the renminbi and lowered the currency's fixing rate to spur growth.
On Wednesday, the Chinese renminbi was devalued by another 1.6 percent, following a 1.9 percent reduction a day earlier. Cheaper renminbi will boost China's exports but will reduce its imports, thus reining in demand from commodity exporters such as Indonesia.
'Commodity prices also fell today [Wednesday] so there appears to be a sentiment against the currencies of commodity-producing countries,' noted Mirza.
Indonesia exported US$16.5 billion worth of goods to China last year, mostly commodities, data from the Central Statistics Agency (BPS) show. The amount was equivalent to 11.3 percent of Indonesia's total overseas shipments, or the largest export market for a single country.
On Wednesday, Asia-Pacific currencies fell sharply as the devaluation of the Chinese fears mounted that renminbi increase volatility in the financial markets, draining riskier assets from emerging economies. The Indian rupee, the Taiwanese dollar, and the Malaysian ringgit all fell by around 1 percent, extending their losses after already falling sharply a day earlier.
Emerging-market stocks also sank to the lowest level since 2011, extending declines in a bear market, and currencies slid as China's falling renminbi spurred bets developing nations will weaken their currencies to stay competitive.
The Jakarta Composite Index (JCI), the main price indicator on the Indonesia Stock Exchange (IDX) plunged deeper by 3.1 percent to close at 4,479.5, a level not witnessed since February 2014. The steep decline occurred after a 2.67 percent decline on Monday.
Sean Yokota, the head of Asia strategy with SEB, a Stockholm-based investment bank, said that the renminbi's devaluation had unmasked the downside risks in China's economy which, ultimately, signaled further weakness in Asia's growth outlook.
'[The renminbi's] strength was an anchor in preventing Asian currency weakness versus the US dollar but that anchor has been lifted,' Yokota noted.
'In addition, this will invite US politicians to start making noise on protectionism and currency wars, which are negative for global trade and sentiment,' he commented.
The rupiah has fallen by around 10 percent this year, the most in Asia after the Malaysian ringgit, though intervention by BI in the market has prevented the currency from slumping even further.
BI's foreign exchange reserves have fallen in five consecutive months to touch $107.6 billion by the end of July, indicating that the central bank has been supplying dollars in the market aggressively to support the under-pressure currency.
BI supported the rupiah because significant currency depreciation would alter the cost of infrastructure projects and ultimately affect the outlook for structural reforms needed to fix the country's current account and inflation problems, said Helmi Arman, an economist with Citigroup.
'Rupiah depreciation, especially if severe, is generally not deemed desirable among government officials,' he wrote in a research note distributed Wednesday. 'We think this view is also shared somewhat by the central bank.'
