Rupiah Depreciates Amid High Current Account Deficits

CEIC Indonesia Data Talk: The Indonesian rupiah continued to depreciate against the US Dollar in July, breaching the IDR10,000/USD on 15 July 2013 for the first time since early September 2009. As of the end of July, the rupiah traded at IDR10,278 USD. Bank Indonesia (the central bank) has intervened to stabilise the rupiah from excessive volatility and stem the fall in foreign-currency reserves, which declined to USD92.67 billion during July 2013 from USD98.10 billion in June 2013 and USD105.15 billion during the previous month. Indonesia’s international reserves have been on a general downward trend since their recent high in August 2011 when a total of USD124.64 billion was recorded. Bank Indonesia would argue that its present reserves coverage (in terms of imports) are within international adequacy standards, although these ratios have fallen; as of June 2013, international reserves amounted to approximately 6.3 times total imports compared to 7.0 during January 2013 and 8.3 in August 2011. The depreciation of the Indonesian rupiah follows a widening current account deficit during the second quarter of 2013; the deficit widened to USD9.85 billion compared to USD5.82 billion during the previous month. Bank Indonesia expects that the present wave of depreciation will help stem this trend as imports become dearer, enhancing the competitiveness of its industries, at least in the long run. However, Bank Indonesia recognises that both weaker global demand and domestic demand mean that growing exports may take some time to translate into stronger economic growth. Indonesia’s depreciating rupiah is also a sign of the wider region-wide currency depreciation, prompted by the US Federal Reserves’ indication that it will scale back its quantitative easing (a lax monetary policy aimed at boosting liquidity). Previously, the cash injection by the Federal Reserve has allowed cheap dollars to flow into emerging economies, including those in Southeast Asia, allowing them to finance large current account deficits. However, as foreign investors begin withdrawing their investments in favour of safer asset classes (particularly US fixed income instruments), emerging economies – including Indonesia – will find themselves hard-pressed to finance their current account deficits. In Indonesia, the current account deficit amounted to 4.36% of nominal GDP as of the quarter that ended June 2013, widening from a deficit of 2.63% of GDP during the previous quarter. Indonesia last reported a net surplus (amounting to 0.34% of GDP) during the third quarter of 2011. At present, Bank Indonesia has indicated that the depreciation of the rupiah is presently in line with macroeconomic fundamentals, although it will continue to intervene to prevent volatile exchange rate movements. Indeed, sharply reduced international reserves (at least in absolute terms) mean that Bank Indonesia is more likely to allow the currency to depreciate, intervening only to avert pernicious movements on its foreign exchange market. Discuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription. By Meytha Wendharti Google+ Author Profile - CEIC Analyst Back to Blog
27th August 2013 Rupiah Depreciates Amid High Current Account Deficits