Monday 6 January 2014

REINFORCING RUPIAH EXCHANGE RATE



Rupiah exchange rate in the spot market on Tuesday (December 10) weakened 0.13 percent to Rp. 11,990 per U.S. dollar or close to Rp. 12,000 per U.S. dollar. On Monday (December 9) Rupiah stood at Rp. 11,974 per U.S. dollar, 0.08 percent slightly lower than the previous day. Meanwhile, Bank Indonesia (BI) middle rate was Rp. 11,956 per U.S. dollar or strengthened 0.03 percent.

Pressure on Rupiah came from the United States (U.S.) employment data which improved thus making the U.S. dollar strengthened. Market concerned that the improvement in the U.S. economic data will accelerate the reduction of U.S. monetary stimulus (tapering off). Market players are now awaiting the result of Bank Indonesia Board of Governors Meeting on December 12, 2013, and the latest developments about the continuation of the U.S. stimulus programs in the Federal Open Market Committee Assemblies (FOMC) on December 17-18, 2013.

Currently, what is expected is the strengthening of Rupiah exchange rate back to a stabler level. The real sector needs a stable exchange rate, making it easier for them in running their businesses. For example, the effect of exchange rate volatility on cell phones trade.

The weakening of the rupiah started to be visible since last August, and it has hit cell phones trade. According to data of the Indonesian Cellular Importers Association (AISI), since Augustaverage cell phone demand has decreased by 30 percent. Cell phone demand which decline is mostly in the category of high end or luxury phones. AISI classified this type of cell phone as a phone with a price range of above Rp. 3 million.

If so, attempts to stabilize Rupiah exchange rate must absolutely be done. Rupiah position which is around Rp 12,000 per U.S. dollar lately is considered too low (under-valued) because of the negative sentiment of the market. Markets observed that inflation expectations are still high at around 8.5 percent and current account deficit (DTB) which is still wide (3.5 percent of total gross domestic product) becomes a negative sentiment.

Therefore, it is appropriate for Bank Indonesia to aggressively issue a policy that tends to be restrictive to prevent a surge in inflation and to improve current account deficit. To address the trade deficit, the government on Monday (December 9), issued a second volume of fiscal policy package.

The package consists of two rules, namely increase of income tax rates of certain imported facilities for export purposes. Cell phone is one of the groups of goods imposed by increase of Income Tax of Article 22. The implementation of this package is expected to provide a new confidence in the market so as to encourage gradual appreciation of Rupiah.

It is appropriate if Bank Indonesia stated that Rupiah movement next year is influenced by internal and external factors. In addition to the political year, the issue of tapering off of economic stimulus by The Federal Reserve Bank is still shadowing the exchange rate. From the internal factors, Rupiah movement was caused by general election activities. After completion of the general election, Rupiah usually strengthened.

This straightened out the previous reports that Rupiah could strengthen if the new president has been elected. However, these internal factors become one of the causes of the movement of Rupiah exchange rate. But it should also be remembered that there are also external factors that affect the weakening of Rupiah.

There are no most dominant factors that cause the exchange rate to weaken. Internal and external factors are equally influential. Actually, the weakening of the currency of a country does not necessarily mean a disaster. Because there are some countries who feel happy when the currency weakens. For example, Japan and China who have successfully weakened their currencies, the Yen and the Yuan, so the two countries exports advanced rapidly because their product competitiveness is more superior.

When the currencies of the two countries weakened, the manufacturing sector in these countries could take advantage of this situation. However, Indonesia seems to have not been included in this phase. Indonesia’s dependence on imports is still very high. That is why there is panic when there is a weakening of Rupiah.

Strengthening of Rupiah in the next year when legislative and presidential elections are held, have become the trend of Rupiah exchange rate every political year. It was also followed by increase of economic growth in the year of the general election. It has become a tradition that before or after the general election, Rupiah exchange rate tends to strengthen.

With the conditions that heat up in the political year, Rupiah exchange rate will return stable in the midst of a national economic impact which is now volatile. However, Bank Indonesia should continue to monitor the market for development trend after the election is over. Along with the decline in inflation and improvement in DTB, sooner or later Rupiah exchange rate will strengthen against the U.S. dollar at around Rp. 10,500 per U.S. dollar.

Business News - December 13, 2013

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