Sunday, 10 August 2014


The euphoria of Rupiah’s sudden upjump against USD at the moment of quick count result announcement at the Presidential election on July 3,2014 last was only momentary. Rupiah strengthened dramatically from Rp 12,000 to Rp 11,550.- per USD the moment election outcome was known.

However, the Government and BI must not be off guard because of Rupiah sudden strengthening since Indonesia’s fundamental economy, the actual foundation of Rupiah value, was still shaky. So the effort to stabilize Rupiah should be on top national agenda to ensure sustainable economic growth.

As predicted, depreciation of Rupiah value against USD was a hot topic of discussion in many for a because of its chain effect on many areas like import which became more costly. And yet the manufacturing industry still had to import 40% to 60% of overseas loan due which turned higher in Rupiah.

Not just that. Rupiah depreciation would weaken competitiveness of Indonesian export commodities because exporters had to increase export price due to increased production cost; a pity because low price of exported goods had been Indonesia’s plus point.

Rupiah depreciation was also made worse by the Fed’s policy in the USA who planned to run Tappering Off as economic condition turned better, which was indicated by drastic downturn of unemployment level which came to only 6.7%. Moreover the Fed also signaled to increase benchmark rate net year which stimulated capital owners in America to transform their asset into USD because it was more attractive.

Other depreciating factor to Rupiah was Law No. 42 year 1999 on Forex traffic and exchange rate system where it was explicitly stated Indonesia adopted Free Forex Regime, where anyone might bring in and out foreign currency including USD in vast amount was transferred to overseas banks because the interest was more attractive, it was fully permissible.

Another cause of Rupiah depreciation was the wedding deficit in trade balance. This was due to downturn of non oil-gas export on account of falling primary commodities price in the world market and declining purchasing power among buyer countries, i.e. China, India, Japan, and the Middle East.

The swelling deficit in trade balance was also due to growing import of oil although price of oil had been increased at home on June 22, 2013 last, causing Rupiah value to slump as forex income export was less yhan import. This means supply of USD was reduced or demand for USD increased due to increased import, causing Rupiah value to be unpredictable.

Rupiah weakened in moments before the election, soaring through Rp 12,000 per USD but tend to fluctuate, a condition which was different from last year when Rupiah value dropped drastically. At that time USD rushed for hometown as foreign investors panicked due to Tappering Off policy by the Fed.

Apparently low supply of USD affected the currency market at home, which made USD to strengthen and Rupiah nose dived down even to as low as Rp 12,000 per USD triggered by external condition, among others the geo-political condition in Iraq. Meanwhile at home there was pressure on current transaction as investors waited for the election outcome on July 9. Hopefully after the election the climate would be better for Rupiah.

In the future, although it was hard to predict Rupiah to be back to the Rp 10,500 per USD level, it could still be expected to reach Rp 11,000.- level. The estimate was inclusive of some economic risk, internally or externally.

The threat of deficit in current transaction forced was Government to safeguard Rupiah for the sake of export and to reduce import. Rupiah stood a change to strengthen as some BUMN companies did hedging in paying their overseas debt.
It was generally agreed that hedging of foreign currency by BUMN as not disadvantageous and even bring positive impact on Rupiah.

The only thing was that BI’s assumption for Rupiah in RAPBN State Budget 2015 to be around Rp 11,900 – Rp 12,100 per USD forced speculators to re-calculate which made Rupiah fluctuate aimlessly through 2015. Indonesia was still under the pressure of deficit and might need 2 to 3 years time to recover.

Only trouble was that by the time USD flowed out of the country, the demand for it increased at home due to swelling import of oil; not to mention to pay installment of overseas debt due and dividend for foreign shareholders. there was under-supply of USD as export dropped while the need to import raw materials, product components and capital goods strengthened. Under such circumstance current transaction was pressured and Rupiah sank even deeper.

The reasonable way to strengthen Rupiah was to go back to basic: strengthen fundamental economy, squeeze down deficit in current transaction through reduction of subsidy for oil and electricity, minimize import and boost export of non oil-gas commodities. Accordingly effort must be enhanced to lessen overseas debt. It was better to borrow money from domestic resources. Even if it was inevitable to borrow from abroad, it pays to do hedging. (SS)

Business New - July 16, 2014

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