Rupiah’s Depreciation Casts a Shadow over Investment Climate

CEIC Indonesia Data Talk - April 23, 2015 The optimism of foreign investors towards the Indonesian equity market seems to be faltering, partly due to negative sentiment surrounding the political situation and prolonged depreciation of the Indonesian Rupiah (IDR) against the United States Dollar (USD). This is evidenced by the persistent foreign net selling for six of the past eight months on Indonesia’s Stock Exchange, with net sales of IDR 5.43 trillion in March 2015. The dampened economic outlook from a weaker currency caused fear of profit erosion in the stock market (on a foreign exchange adjusted basis), reinforcing foreign investors’ decision to sell their stocks. Nevertheless, the Jakarta Composite Index, Indonesia’s benchmark stock index, has been on a bullish trend, rising to 5,518.68 points in March 2015 from 5,137.68 points six months ago, despite the strong selling pressure from foreign entities and the weaker currency, suggesting that the market is still receiving support from domestic investors. Statistics from the Bank of Indonesia (the central bank) show the IDR depreciating against the USD since March 2014, weakening to IDR 13,084/USD in March 2015, its lowest level since June 1998, from IDR 11,404/USD during the same period of last year. The Rupiah’s depreciation is arguably not caused by Indonesia's economic fundamentals, but largely with the improving economic condition of the US along with the expectation of an increase in the US’s benchmark interest rate by the US Federal Reserve in the near future. The stronger USD has also caused the currencies in other countries to weaken against the greenback, as investors exit emerging markets in anticipation of a higher return in the US. Even though the weakening trend of Indonesia’s currency is a concern, with the rupiah touching IDR 13,000/USD in March 2015, the government believes that the depreciation will improve the country’s trade balance, as imports become more expensive while exports become more competitive. The boost to exports would also be expected to help improve the current account deficit, which expanded to 3.19% of GDP in 2013, before narrowing to 2.95% in 2014, compared to a current account surplus of 0.19% of GDP in 2011. Unfortunately, Indonesia’s exports have yet to benefit from the weaker currency. Statistics from the Central Bureau of Statistics indicate that exports from Indonesia have been declining year-on-year for five consecutive months since October 2014, to USD 12.29 billion in February 2015, their lowest level since October 2010, from USD 14.63 billion a year ago. Nevertheless, the lower export value was offset by declining imports, which fell to USD 11.55 billion in February 2015 from USD 13.79 billion in the previous year, leading to a trade surplus of USD 738.3 million, thus preventing a widening of the current account deficit. The depreciation of the IDR against the USD should theoretically provide improved opportunities to boost exports in the form of enhanced competitiveness of Indonesian products. However, Indonesia has not been able to reap its benefit in part due to the sluggish trend in prices of its prime export commodities in tandem with a slowdown in the economy of China, a large source of demand for Indonesian exports. Without an increase in export earnings, the weaker IDR will make it more challenging to repay external debt, which rose to 32.93% of GDP in 2014, from 29.14% in the previous year. This would especially hurt the private sector, which has increased its external debt to 18.33% of GDP from 15.61% over the same period. The Bank of Indonesia takes a serious view of the continuous weakening of the Rupiah and has intervened in the foreign exchange market to stabilize its depreciation. Partly due to this foreign exchange intervention, Indonesia’s foreign currency reserves fell to USD 105.94 billion in March 2015 from USD 109.80 billion in the previous month. However, the surprise cut in the key interest rate by 25 basis points in February 2015, the first decrease in three years, also shows the determination of the central bank to not forgo economic growth, even if it is at the expense of further aggravating a weaker currency. By Yudha Prawira - CEIC Analyst Discuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription. Back to Blog
23rd April 2015 Rupiah’s Depreciation Casts a Shadow over Investment Climate