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Rupiah to strengthen further as foreign investors return: BI
The rupiah has rebounded by almost 15 percent since the end of March to reach 13,877 per US dollar on Friday.
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ank Indonesia (BI) expects the rupiah to continue strengthening – even after the currency meets pre-COVID-19 levels – as foreign investors return in expectation of a global economic recovery.
The rupiah rebounded by almost 15 percent since the end of March to reach 13,877 per US dollar on Friday, Bloomberg data shows, erasing most of the losses it recorded in the first three months of the year amid outbreak fears.
“Foreign investors’ confidence in Indonesia’s economy is getting better as reflected by rising capital inflow into government bonds,” BI Governor Perry Warjiyo told reporters in a live-streamed news conference on Friday. “The rupiah remains undervalued and will strengthen further.”
The rupiah was still undervalued, Perry claimed, as the country’s credit default swaps had yet to fall to pre-pandemic levels while its current account deficit (CAD) had narrowed and inflation remained low.
On March 23, the rupiah crashed to 16,575 against the US dollar, its lowest level since the 1998 financial crisis. Investors sold US$10.34 billion worth of assets in the first quarter of this year, according to Finance Ministry data.
The government and the central bank have pledged to strengthen their cooperation and measures to ensure macroeconomic and financial stability. BI decided to keep its benchmark interest rate at 4.5 percent last week, despite room for further easing, to maintain financial market stability.
The financial market is currently being buoyed by hopes of an economic recovery as Jakarta, Indonesia’s financial hub and an engine of growth for the economy, prepares to reopen, with some offices, restaurants and retail outlets permitted to resume operation from June 8 under strict health protocols.
The central bank reported Rp 18.67 trillion ($1.33 billion) in net inflows, mainly in sovereign debt papers, from the second week of May to the first week of June. From April 1 to May 14, BI recorded $4.1 billion in net inflows.
“Our foreign exchange reserves will increase this month, driven by a strengthened rupiah and capital inflows,” Perry said, adding that better market conditions than three months ago reduced the need for the central bank to intervene in the market.
The central bank bought about Rp 166 trillion in government bonds in the secondary market during the first quarter of 2020 to stabilize the rupiah and another Rp 26.1 trillion to support budget financing needs, boosting the central bank’s ownership of government bonds to Rp 445.4 trillion.
“We believe that BI’s policy measures will continue to cushion the rupiah in the short-term,” researchers at Fitch Solutions wrote in a research note. “Moreover, a forecasted narrowing in CAD in 2020 due to slightly cheaper imports will also add to investors’ confidence in Indonesia’s fundamentals.”
However, they warned that risks remained for the currency as Indonesia continued to record new COVID-19 cases while facing limited health care capacity.
The government’s initial mismanagement of the COVID-19 outbreak led to a collapse in investor confidence in the country’s assets, including the rupiah.
“Downside risks will continue to emerge from the COVID-19 outbreak in Indonesia. As we have noted, cases across Indonesia continue to rise at a rapid pace, and the country has limited health care and financial resources to deal with a widespread outbreak.”
