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August 23, 2013

Indonesia Under Pressure to Prevent Plummeting Rupiah

by Kate Lamb

Indonesia’s government has announced new policies to mitigate the rapidly depreciating rupiah, which has faced its worst week since 2008. Analysts say the measures are unlikely to be effective in the short term, because of broader trends affecting currencies across Asia.

A darling of investors at a time when advanced economies were flailing, Indonesia’s economic boom is being rapidly undermined by its plummeting rupiah.

Following reports of a record high current account deficit, the country has faced sell-offs in the rupiah, stocks and bonds. This week more than $500 million in global funds have been pulled from the local stock exchange.

Already among Asia’s worst performing currencies this year, the rupiah has now suffered its worst week in four years, sliding 4.2 percent. On Friday the government announced plans designed to boost investment and reduce imports.

The measures include increasing import taxes on luxury cars, reducing oil imports and providing tax incentives for investments in agriculture and the metal industries.

HSBC senior economist Fauzi Ichsan said the plan would not prevent the rupiah from depreciating further in the short term.

“Certainly the policy package will help boost exports, boost foreign direct investment but that’s for the long run. The impact of the policy once it is in implemented will only be felt in three to six months, earliest, so it does not really address the immediate problem of the lack of dollar liquidity in the foreign exchange market,” said Ichsan.

The Indonesian government has also revised its GDP growth estimate from 6.3 to 5.9 percent this year.

Ichsan said the rupiah was likely to remain ‘fragile’ and would not rebound until after the general election in the second half of 2014.

Speculation that the U.S. Federal Reserve will begin winding down its stimulus program, along with slowdowns in China and India have also hit Indonesia, which relies heavily on commodity exports.

Currencies across South and Southeast Asia have fallen hard this week, with Indonesia and India suffering the steepest losses. The currencies of Thailand, Malaysia and the Philippines also fell, but by less than one percent.

But analyst Andrew Colquhoun, from Fitch Rating in Hong Kong said concerns the region could be headed for a repeat of the Asian Financial Crisis of 1997 are unwarranted.

“We think Indonesia is in a rather stronger position today from a sovereign credit perspective certainly than it was in 1996 or 1997 and that is true across a range of areas. But one factor is the self insurance that Indonesia and a number of other Asian sovereigns have built up in the form of foreign currency reserves,” he said.

Colquhoun also suggested there was a ‘global reorientation’ of economic growth drivers away from investment and construction within China and toward growing demand in the advanced economies. He said that was also contributing to currency declines in the region.

Fitch Ratings said policy management would be an important factor in whether economic and financial stability was maintained in India and Indonesia.