The Jakarta Post
As expected, Bank Indonesia (BI) decided to raise its benchmark interest rate by 25 basis points to 4.5 percent during the central bank’s Board of Governors meeting on Thursday as the rupiah remained under pressure.
However, the currency continued to hover at the level of Rp 14,000 per United States dollar on Friday despite the rate hike. The currency will likely continue to stay at a range of between Rp 13,900 and Rp 14,000 as the United States central bank is expected to hike its interest rate.
The Federal Reserve (the Fed) raised its benchmark interest rate by 25 basis points in March to a range of 1.5 percent to 1.75 percent. The US central bank plans to raise its interest rate three times this year, but analysts predict that it would happen four times as inflation continues to rise.
Under the initial plan, the Fed rate is expected to climb to 2.1 percent at the end of this year and 2.9 percent at the end of 2019.
The Indonesian currency came under pressure following the surge in the Fed rate. The rupiah exchange rate fell further in early May as foreign capital began to exit from the country’s financial markets.
Global investors are relocating their portfolio investment from financial assets in emerging countries, including in Indonesia, to US dollar-dominated assets to take the advantage of the rise in the US treasury yields, which have been on the upward trend lately due to the rise in Fed rates.
Last week, the rupiah reached Rp 14,100, breaking the psychological barrier of Rp 14,000 per dollar, its lowest level since 2015 as the disappointing reports on Indonesia’s foreign trade in April further added the negative sentiment on the currency. In April, Indonesia suffered a trade deficit of about US$1.6 billion against a forecast surplus of $700 million.
The rupiah has lost about 4 percent of its value against the US dollar this year. Although the fall in the rupiah exchange rate was still relatively low compared to the fall in the Jakarta Composite Index (JCI), which has already lost about 7 percent since the end of 2017, its implications on the economy are quite diverse, especially on the payment of public and private foreign debts and growing costs for the procurement of imported goods, including petroleum products. A further fall in the rupiah exchange rate may damage market confidence in Indonesia’s economy, and if it occurs, it could trigger the further withdrawal of foreign funds.
However, Vice President Jusuf Kalla played down the impact of the fall on the economy. Instead, he said, the weakening rupiah was a blessing in disguise for the country’s exports. According to Kalla, thanks to the rupiah depreciation, goods will be more competitive in overseas markets, which could in turn provide an opportunity for Indonesia to boost its exports.
But Kalla’s argument seems too good to be true, given that most of the country’s export-oriented companies still rely on imported materials for their production. For natural resource-based commodities such as palm oil, rubber, cocoa and coffee as well as mineral products, the fall in the exchange rate provides windfall profits.
With the stronger dollar, export earnings in rupiah substantially increase. Many rubber and coffee farmers, for example, became rich during the 1997/98 financial crisis as prices of the commodities rose at least four-fold in the local market. At the time, the rupiah exchange fell to as low as Rp 15,000 per dollar from Rp 2,500 per dollar before the crisis hit the country.
However, the windfall profit was due to a surge in the value of the US dollar rather than an increase export volume.
The export of industrial goods is a different story. The weak rupiah will unlikely be able to significantly improve the competitiveness of the country’s industrial goods, as a large part of their raw materials are still imported. Replacing the imported raw materials with locally made products is difficult and takes times. Many of the imported raw materials could not even be substituted because of a lack of local sources.
According to the Indonesian textile Association (API), more than 70 percent of textile raw materials used for domestic industry are imported, mostly from China. Most of the textile raw materials are not available in the local market.
The government has actually introduced a number of regulations to reduce imported raw materials through an import substitution program. However, the policies are mostly imposed on products that are sold in the domestic market, such as cars and smartphones. In the automotive sector, for example, imported cars should partly use local components to be able to enter the local market.
So, if the question is, “Can weak rupiah help boost our exports?”, the answer is certainly “no”. What we actually need is to eliminate bureaucratic barriers and reduce logistics costs to enable our goods to compete in the overseas market.