Rupiah drops to IDR 14,700 per US dollar
The Indonesia currency has recently dropped to IDR 14,700 on August 31, 2018 (Friday). This situation is also evident in other economies in the region where their currencies have taken a hit. For instance, the Philippine Peso faced a 5.62% decline in their currency from end of 2017 to early August.
Why has Indonesia currency dropped?
According to Coordinating Economic Minister Darmin Nasution, the main cause of a weakening Rupiah is due to external factors, including the Argentinian crisis, the Turkish crisis, rising US interest rates, stronger US dollar, and the US-China trade war.
The Indonesia economy is also currently running on a current account (CA) deficit (when a country’s imports exceeds their exports value), making the IDR is much more sensitive to currency outflows and market sentiment. This is because countries like Indonesia, Philippines, and India that have CA deficits require foreign inflows, which can be obtained through investments, to close their CA gap and support their import needs. So when foreign investors rescind their investment (capital outflows), this expands the CA gap (resulting in greater deficits) and causes their currency to weaken. This is what’s happening after investors saw Turkey and Argentina, both emerging markets like Indonesia, going into an economic crisis, as they feel it’d be safer to pull out of Indonesia and invest in a developed country.
Thankfully, the Argentinian crisis has not affected the Indonesia economy, and in turn the Indonesia currency, as severely as the Turkish crisis due to their weaker relations with Argentina compared to Turkey. Additionally, with the US$50 billion aid given by the IMF to Argentina, Nasution is hoping for the Argentinian economy to recover soon.
What has the government done to counter this?
The Indonesian central bank has purchased IDR 3 trillion (US$202.53 million) worth of government debt papers on Friday to avoid its sell-off and stabilize the Indonesia currency. This is on top of the IDR 79.23 trillion previously spent for government debt papers from January to August 30, 2018.
Bank Indonesia (BI) has also increased the interest rate of Indonesia economy by 125 basis points (1.25%) and intervened in the bond and IDR currency market to minimize future losses. As a result, BI has used up a total of $14 billion worth of foreign reserves, leaving the country with $118 billion as of July.
The government also plans to launch several measures, such as limiting the amount of imports of consumer goods, using palm-based biodiesel to reduce fuel imports, boosting Indonesia’s tourism, and raising exports, to increase dollar supply and strengthen IDR.