T

he rupiah has led gains among emerging-market currencies since the start of this year along with the Brazilian real and Malaysia'€™s ringgit. The rupiah has strengthened despite the slow recovery of the world'€™s economy.

The Indonesian currency rose 5 percent from Rp 13,830 per US dollar at the end of December last year to Rp 13,000 early last week.

Although the currency slightly weakened before the close of the trading on Friday, it remained one of the strongest currency in emerging markets. Like rupiah, the Brazilian real and the Malaysian ringgit also surged by about 5 percent this year amid inflows of foreign funds from developed nations to emerging markets, which offer higher gains.

The surge in the rupiah is good news for local manufacturing sectors that mostly still use imported raw materials to support their production, although many export-oriented companies are also worried that further appreciation of the currency could hurt their exports.

In general, the increase will bring more confidence to the country'€™s economy. The more stable economic condition will certainly draw more foreign investment as a stable rupiah will ensure certainty in business.

President Joko '€œJokowi'€ Widodo claimed that the surge in the rupiah was partly contributed by an improvement in the country'€™s economic fundamentals.

Although Jokowi acknowledged that external factors such as changes in monetary policy in Japan, China and the European Union was as major driver of the surging rupiah, a series of the economic policy packages issued since late September last year have also played a part in the surge.

In fact, Japan'€™s surprise shift into negative rates in January and additional stimulus from the European Central Bank (ECB) have contributed to the sharp increase in stock prices and currencies of emerging markets as investors have turned to emerging markets.

The surge is quite significant because with the rise, its value has almost reached a real effective exchange rate of about Rp 12,600 per US dollar.

The Indonesian currency plunged to 14,600 per dollar in late September last year, the lowest level since the since the 1988 financial crisis. The fall occurred due to massive outflows of foreign funds in response to concerns over the expected increase in the US interest rate and the devaluation of the Chinese currency.

The most important thing is how to maintain the value of the rupiah at the current level. Based on its historical performance, the rupiah'€™s movement is influenced more by changes in global monetary policies rather than by changes in domestic macroeconomic indicators.

There are a number of external factors that will continue to affect the direction of the rupiah. The hike in the US interest rate, the halt of the economic stimulus programs launched by Bank of Japan (BOJ) and the ECB, and the possible devaluation of the Chinese yuan,will remain important factors that could undermine global financial markets.

Uncertainties related to the US Federal Reserve (Fed) rate hike plan was the main culprit for the global market shock in 2015.

This year, the Fed looks less '€œdangerous'€ with a change in stance in its rate increase plan. The Fed kept its interest rate unchanged on Wednesday and substantially scaled back its expectations for further moves ahead, a policy that could bring more certainty to financial markets.

The Fed raised its rate by 0.25 percent to 0.5 percent in December last year, the first rate hike in nearly a decade. At the time, it projected four rate hikes in 2016, but on Wednesday, it projected just two increases this year and two hikes in 2017.

For this year, analysts predict the Fed will increase the interest rate in June and December, giving the global monetary system more time to prepare for the increase. Previously, the Fed was expected to make its second rate increase in April.

With a more dovish Fed and if BOJ and the ECB maintain their stimulus, and China keeps its promise not to devalue the yuan, the Indonesian rupiah and stock market will likely be free from global shocks at least until June.

However, if Bank Indonesia continues to lower its benchmark rate, the rupiah could come under pressure. On Thursday, the central bank lowered its benchmark rate by 25 basis points to 6.75 percent, the third decline since January.

The chance to further strengthen, or at least maintain, the current level,would be larger if the House of Representatives agreed to approve the Tax Amnesty Law, which could attract the repatriation of billions of US dollars kept overseas by wealthy Indonesians.

The government estimates that funds kept by Indonesians in Singapore alone could reach some US$200 billion. If a half of those funds are brought into Indonesia, there will a huge boost in the supply of US dollars in the country.

The key to maintaining the value of the Indonesian currency relies on the availability of US dollars in the country'€™s banking system.

If Indonesia earns more dollars from its exports, foreign tourists, and foreign investment, it will have no problems in mitigating the impact of possible outflows of foreign money from the local stock market.

The government has introduced a number of incentives to encourage investors to deposit their dollars in Indonesian banks in order to increase the country'€™s foreign exchange reserves.

In addition, a series of economic policy packages have been issued to help export-oriented companies and to attract more foreign investment. If these programs run as expected, there should be more dollars coming in to protect the rupiah.
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The author is a staff writer at The Jakarta Post.