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BI sees rupiah at turning point in 2023
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he rupiah is likely to take an unexpected turn toward appreciation against the United States dollar in 2023, resulting in lower imported inflation, both Bank Indonesia (BI) officials and economists projected.
In a forum held by the Institute for the Development of Economics and Finance (INDEF) on Tuesday, BI estimated that in the baseline scenario, the Indonesian currency would strengthen significantly after the first quarter of next year (Q1/2023).
According to data from state-owned lender Bank Mandiri, the rupiah had appreciated by 1.7 percent month-to-date (mtd) or depreciated by 8.5 percent year-to-date (ytd) to Rp 15,468 per US dollar, rising from the depreciation of 10.4 percent ytd on Nov. 30.
On Nov. 30, meanwhile, United States Federal Reserve (Fed) chairperson Jerome Powell implied that the federal funds rate (FFR) would rise at a slower pace than the previous month, which signaled lower pressure on the rupiah.
"Higher interest rates for longer [in the US and Europe]," BI Governor Perry Warjiyo said.
Read also: BI implements third 50 bps rate hike to aid rupiah
In BI's baseline scenario, the FFR would reach its peak at 5 percent in the first quarter of 2023 and would remain in that position until it dropped to 4.75 percent by the end of next year.
However, in the upward risk scenario of the Indonesian central bank, the FFR would peak at around 5.25 to 6 percent, which would drop to 5 percent during the same time frame.
"This phenomenon is a signal of a strong dollar," Perry continued.
Perry said that although the US Dollar Index (DXY) has fallen to 106 in recent weeks from its peak of 114, its strength might remain robust in accordance with the figures of inflation, FFR and risk of recession in the US.
As investors prefer the "cash is king" mantra these days due to high uncertainty, Perry explained, a stable pattern of FFR hikes would be the doom of this mantra.
He estimated that if the FFR hike peaks in the months between January and March, the first quarter of 2023, it would signal clarity in the Fed's policy, which could incentivize investors to put their money in Indonesia and other emerging markets again.
As a result, the rupiah is expected to strengthen after the first quarter due to its strong fundamentals, including robust economic growth, low inflation rates and continuing trade surplus.
"Uncertainty would still be relatively high until Q1/2023 and [would] drop after that," Perry continued.
BI economic and monetary policy head Solikin M. Juhro added that the inflation rate in 2023 was expected to drop within the 2 to 4 percent range.
He said that the central bank's interest rate needed to be raised higher at the beginning so that inflation would be clamped down before it gets too high.
Other than that, the central bank has also become involved in a non-rates policy that could slow down inflation.
“If you look at countries abroad, where they only have policy space from a monetary perspective, they only use interest rates,” Solikhin said, “The pressure comes from the supply side, [so if] they respond with interest rates, inflation will not go down.”
Read also: Exports rise on increased China, India demand
Concurring with BI’s projection, economists agree that the rupiah has a bigger chance to strengthen in the coming period.
Bank Mandiri economist Faisal Rachman said on Monday that "there still exists" room for further rupiah appreciation starting from the Fed's monetary policy meeting this December, as during the same period inflation is also seen to slow down in Indonesia.
As economic growth is expected to gain into positive territory in 2023, along with the trade balance, due to relatively high commodity prices, the rupiah’s fundamental is deemed "enough", when compared with the currencies of the US and Europe as both regions are expected to enter a recession.
"Domestic inflation will be around 5.4 to 5.6 percent at the end of the year – lower than the initial estimate of 6 percent," Faisal told The Jakarta Post, adding: "In 2023, [inflation] is estimated to hit 3.6 to 4 percent."
Indonesian Chamber of Commerce and Industry (Kadin) economist David Sumual also expected the rupiah to get stronger as the dollar became weaker, due to the manufacturing purchasing managers' index (PMI) contraction and lower inflation in the US.
He expected the Fed to raise the FFR by 50 basis points in December due to the shift for a slower pace of hike.
"I think [Indonesian import growth] would be positive amid expectations of economic growth, which is above the average of other emerging markets in 2023," David told the Post on Monday, noting that "imports of industrial machinery can [also] be cheaper."
Institute for Demographic and Poverty Studies (IDEAS) director Yusuf Wibisono agreed that the "strong dollar" era is expected to end in the coming months, while the rupiah gains its momentum to appreciate.
However, he questioned whether the rupiah should have depreciated in the first place as there was a continuing trade balance surplus, which meant that the dollar should have been in ample supply in the Indonesian economy.
If the rupiah does not strengthen or weaken, he said, it meant that a lot of the export earnings did not return to Indonesia or did not enter the market.
The reason could be because entrepreneurs need foreign exchange for their import needs and anticipation over concerns on the uncertainty of the foreign exchange market, he said.
"Only by effectively enforcing the obligation to repatriate export earnings, and the obligation to convert these earnings to rupiah, will the rupiah be strengthened in the long run," Yusuf told the Post on Monday.
