TO REVIEW THE PROSPECT OF RUPIAH IN 2013

Theoretically, the course of currency value was determined by two factors, i.e. the fundamen­tal factor and technical factor. The fundamental fac­tor was represented by the economic performance of a nation. Meanwhile the technical factors tend to be influenced by historic factor which came from the currency sector forming a certain movement plat­form.

How was performance of the Indonesian cur­rency Rupiah last year 2012 and this year 2013? In fact the course of Rupiah had been downward from early year to end of 2012. To review the position of Rupiah in December 30, 2011 was Rp 9,070. During last transaction of 2012 (28/12) Rupiah was at the position of Rp 9,680. This means that Rupiah weaken­ing all through 2012 had come to 6.7%.

Data of Bloomberg had it that weakest point of Rupiah was in December 12, 2012 last, i.e. at the level of Rp 9,799. Meanwhile Rupiah strongest posi­tion was on January 25, 2012 when it settled at Rp 8,888. Compared to performance of other Asian cur­rencies, Rupiah was the regional currency of worst performance last year.

For comparison, South Korea’s Won managed to strengthen by 7.65% in 2012. Meanwhile Philip­pines Peso strengthened by 6.9%, Singapore Dollar strengthened by 6%. Taiwan’s Dollar strengthened by 4.2%, Thailand’s Baht strengthened by 3.07% and Malaysian Ringgit strengthened by 3.48% over the same period.

In view of the above condition, analysts and economists were of opinion that consumption of do­mestic products marked by increased need of import­ed goods was one of the culprits of Rupiah weaken­ing. On the other hand, the high demand for USD was the cause of reduced stock of USD.

Generally they saw that all through 2012 Ru­piah was not getting any positive sentiment from the domestic side although Bank Indonesia kept maintain­ing BI’s benchmark rate. Although Trade balance once chalked up surplus in early Quarter II, it was not strong enough to support Rupiah movement. Moreover as trade balance posted deficit due to lowered export; in the end Rupiah struggled in vain to get stronger.

Minimum positive sentiment from the domes­tic side was made worse by external adverse con­dition particularly that in the USA and Europe. In the end, it was negative sentiment from the outside which was stronger.

The terrible thing was the fiscal cliff problem in the USA which was starting to be felt in quarter III/2012 last plus the case of debt crisis in Europe which was far from being solved. To compare Rupiah performance this year against that of last year, this year Rupiah performance was the second worst next to India. Rupiah condition was in reverse to the con­dition of other Asian currencies like Singapore dollar and Malaysia Ringgit.

Many market players rated that Indonesia’s neighboring countries was responsive enough in us­ing the momentum of economic slowdown in the USA and Europe. Take for example Singapore and Malaysia who managed to increase domestic spend­ing, unlike Indonesia who was over-dependent on im­port.

Under the circumstances the Government was advised to call out to the industry to play great­er role in increasing domestic consumption. Hence it could be assured that in the future Rupiah would again strengthen although the external condition was still haunting. And soon there would be support from Japan's economic growth and growing demand from China.

Many economist's shared the opinion that deficit in trade balance greatly influenced weaken­ing process of Rupiah which started mid year 2012. Somehow they rated that the condition turned better toward quarter IV 2012 where import flow gradually declined.

Bloomberg survey outcome disclosed that In­donesia's deficit in Trade Balance in November 2012 last was USD 342 million. This figure was much low­er that the deficit in October which came to USD 1.5 billion. The data on deficit if trade balance was released on January 2, 2013 last.

Previously the Governor of BI Darmin Nasu­tion disclosed that by the time deficit in trade balance was showing downturn, pressures on Rupiah would ease down. Therefore there would be no intervention by BI to protect Rupiah. Reasonably it might be concluded that such condition was beneficial to current transaction in Indonesia.

Somehow it was gratifying that Rupiah ex­change rate value was not as high as last year. In 2011 Rupiah even managed to strengthen to as high as Rp 8,400 per USD. As known, a stronger Rupiah was not advantageous to Indonesia’s competitive edge against competitor countries like Thailand, Sin­gapore and Malaysia. Although the ideal Rupiah level was not defined, weakening of Rupiah this year was getting close to fundamental value.

Apparently there were some circles who were not happy about strengthening of Indonesian Rupiah if it was as bad as India's currency because India' Ru­pee had weakened by 20% while Rupiah only around 7% However they were aware that Rupiah was weak compaed to currencies of neighboring countries, moreover the consider the policy of intervention by regulator in Thailand.

In the future Rupiah was still expected to strengthen. Moreover with certainty of fiscal cliff solution in the USA, market players were returning to re-enter the emerging markets like Indonesia. Howev­er, it was realized that there were still rumors around which might weaken Rupiah. One of them was the issue of increased price of subsidized oil.

To safeguard market’s trust in Rupiah, it be­came imperative that macro and macro-prudential policy be made harmoniously. BI together with the Ministry of Finance must remain to be solid in the eyes of market players to keep their confidence in Rupiah to remain high.

It must be understood that since the finan­cial crisis in America in 2008, the central banks of the world kept injecting liquidity to moneymarkets, while Japan continued to inject stimuli. The Europe Central Bank (FOB) had announced their plan to buy Government bonds of European states at the second­ary market in Outright Money Transactions.

The US Central Bank, the Fed, had printed USD 2 trillions of new banknotes within the frame­work of quantitative easing (QE) since 2008. In QE 1 (November 2008 — March 2010) the Fed threw around US$ 1.42 trillion while QE2 (November 2010 - June 2011) liquidity flew as much as USD 600 billion. As per September 2012, the Fed ran QF of USD 40 billions/month which was open ended (flexible duration and size of stimulus depending on economic growth).

So far, the pouring of liquidity showed no no­table impact on the real sector. The influence of open-ended QE on the capital market of commodity prices was merely at sentiment level. Investors were mostly still waiting for the effectiveness of the US monetary policy as well as for the economic development in Europe and the fiscal cliff resolution in the USA.

The Fiscal Cliff issue in the USA (ending of tax slashing effective since the George Bush era as President of the USA) must be watched on however, all was well that ended well and the US economy was free from the fiscal trap and be saved from recession.

The quantitative easing policy in the devel­oped countries might generate side effect or certain risk to emerging markets including Indonesia. Unless the liquidity outflow were effectively managed, it might lead to misallocations of resources.

Certain asset categories like commodities, shares and especially property might show price bub­ble which might endanger the fundamental economy of the states concerned and had the potential of sys­temic risk.

Apparently the easy money policy of devel­oped countries generated spill-over effect in the form of credit expansion in great magnitude in Asian coun­tries and big boom in the property market. In the end property markets such as in Thailand crashed down in mid 1997 with the effect being big outspread by transmission to other Asian countries.

So far, credit expansion in Indonesia had not arrived at risky stage. Up to Q-3-2012 credit-to-GDP ratio in Indonesia was posted at 31.6%, slightly up from 26.4% in 2008 when there was global crisis. The ratio was still lower than in neighboring coun­tries.

To illustrate, the credit-to-GDP ratio in Malay­sia since 2008 had gone up from 97.6% to 117.3% in Q3-2012 whilst credit-to-GDP ratio in Thailand rose from 81.1% to 95.3%. The drastic increase was happening in Singapore where in the same period the ratio rose from 116.5% to 140.6%.

The restless external economy as described above and the strong pressures on Indonesia’s cur­rent transaction seemed to motivate BI to allow greater tolerance to Rupiah weakening. Rupiah value had broken through Rp 9,600/per USD or weakening nearly 6% since early this year till early November 2012. Rupiah was the weakest currency compared to that of Indonesia’s export competitors like Thailand's Baht and Malaysia’s Ringgit which over the same pe­riod strengthened by 2.8% and 3.9%.

Meanwhile the monetary authority seemed to be relaying on currency exchange rate value (to let Rupiah float below its fundamental value) rather than tinker around with policy rate of BI’s credit facility. As footnote, Indonesia's force reserves rose by USD 3.7 billion over the period of June - September 201 2; meanwhile over the same period Rupiah value weak­ened by 2.1%. This was strong indication that BI was considerably tolerant about Rupiah weakening to force disincentive to import and on the other hand encourage export.

However prudence was still necessary, sup­posedly Rupiah was not let alone to sink too deeply and further away from its fundamental value because it would psychologically lead the market to think that Rupiah was rolling downhill. In that case other eco­nomic indicators like growth, bank interest and infla­tion would join the downturn. A condition as such would disturb Indonesia’s fundamental economy as a whole.

The monetary authority must realize that the central banks of the emerging markets tend to race in competitive currency devaluation, i.e. to prevent strengthening, or even drive weakening, of their own respective currencies. Such was to keep exchange rate from being over fluctuative so stability in the real sector could be maintained.

Other reason was the trend of export down­turn of Indonesian non-commodity products, especial­ly non manufacturing, which had been declining since 2007. This downturn signaled degrading of competi­tiveness of Indonesian manufacturing products at the international market.

In stabilizing domestic economy, the exchange rate stabilization policy needed to be continued, How­ever, that forex reserves could be more functional, the idea to form Souverign Wealth Form (SFW) would serve as considerable alternative. Above all, to en­sure market trust was still necessary to maintain global investor's trust in Rupiah. Such would contrib­ute positively to the effort to maintain Rupiah value in the range of Rp 9,300 – Rp 9,600 per USD all year through as a new equilibrium. (SS)

Business News - January 09,2013