The rupiah has continued its upward trend against the US dollar since the turn of the year as the easing of geopolitical tensions encouraged the inflow of foreign funds into emerging markets, including Indonesia.

The rupiah, which had traded at 14,000 per US dollar for most of 2019, started 2020 with an optimistic outlook as the Indonesian currency managed to pass below the 14,000-mark at 13,900. The rupiah continued its upward trend in the following days.

The rupiah, which reached its two-year high at 13,639 per US dollar on Jan. 20, further increased to 13,583 per dollar on Friday. However, it slightly dropped to Rp 13,600 on Monday afternoon amid concerns over the spread of the deadly coronavirus that has spread to many countries since it was first detected in Wuhan, China, several weeks ago.

The rupiah might indicate the strength of the country’s economic fundamentals, but many people, including President Joko “Jokowi” Widodo, have expressed concern that the strong rupiah could make Indonesian goods more expensive overseas.

“Our currency is getting stronger, but we have to be careful when the strengthening happens too fast,” he said during his remarks at the annual financial services industry meeting in Jakarta on Jan. 15.

Bank Indonesia (BI) Governor Perry Warjiyo, however, insisted on Jan. 22 that there was no reason to worry about the appreciation of the rupiah as its upward movement was in line with the market’s response to the range of positive sentiment on the country’s economic conditions.

“Our inflation is at its lowest level, our economy continues to grow, our balance of payments is in surplus and foreign capital continues to flow into our country,” he said during a press conference in Jakarta. “That’s why the rupiah has continued to gain strength thus far.”

Even though the country recorded its slowest gross domestic product growth in over two years at 5.02 percent in the third quarter of 2019, Indonesia still managed to maintain its economic growth at the key 5 percent level amid the global economic slowdown.

The country also booked record low inflation of 2.72 percent in 2019, the lowest level in around two decades as a result of lower inflationary pressure from government-regulated prices.

Bank Central Asia economist David Sumual said on Jan. 21 that positive sentiment also came from the improving current account deficit (CAD), making investing in Indonesian financial assets a more attractive option for foreigners.

As of the third quarter of last year, the country’s CAD narrowed to US$7.7 billion, 2.7 percent of GDP. The figure was lower than the $8.2 billion, 2.9 percent of GDP, in the second quarter of 2019.

Ibrahim, the director of futures firm PT TRFX Garuda Berjangka, told The Jakarta Post that the stronger rupiah was partly caused by BI’s new strategy of intervening in the currency’s exchange trade in the domestic nondeliverable forward (DNDF) market.

“The strategy is clearly successful as it has helped the rupiah to strengthen this year,” he said.

Aside from the favorable domestic economic data, Bank Negara Indonesia economist Ryan Kiryanto said the currency’s strengthening was also influenced by more favorable global conditions.

“Factors such as the signing of the US-China trade deal, deescalating geopolitical tension in the Middle East and the anticipation of a Brexit agreement at the end of this month, have helped the rupiah to gain on the US dollar,” he told the Post.

The strengthening was also helped by the successful offering of the government’s first global bond earlier this month, during which the government was able to rake in $2 billion and 1 billion euro ($1.10 billion)

Despite the persistent positive sentiment from both inside and outside of the country, DBS Indonesia economist Masyita Crystallin warned that the stronger rupiah could have a negative impact on Indonesia’s trade balance.

“The rupiah’s appreciation could trigger more imports, especially of consumer goods, as it becomes cheaper for us to buy stuff from overseas,” she said, adding that the imports could worsen the trade balance deficit and, ultimately, the CAD.

In the meantime, David also warned that the appreciation might not last long given the fact that the strengthening came from short-term foreign investment in equities and bonds. He also predicted that the rupiah could begin to weaken in the second quarter of this year.

“The rupiah will usually receive more pressure during this period as foreign companies pay out their dividends to overseas shareholders at this time,” he said.

In order to maintain the currency at a stable rate, David recommended that the government increase foreign exchange earnings from exports, as well as attracting more foreign direct investment into the country.

“This way, the rupiah can become more stable and resilient to foreign outflows from portfolio investments,” he said.

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