Measures Insufficient Amid Global Turmoil

The rupiah exchange rate has fallen 7 percent since January. The government has prepared a number of measures to halt the rupiah’s fall against the US dollar. However, the measures will unlikely be able to deal with the dynamics of the global economy.

KOMPAS/RADITYA HELABUMI

Consumers and booth attendants try out smartphones on Wednesday (5/9/2018) at the ITC Roxy Mas electronic center in Jakarta. The prolonged rupiah depreciation has prompted an increase in the price of electronics, including smartphones.

JAKARTA, KOMPAS – The government has prepared a number of measures to halt the rupiah’s fall against the US dollar. However, the measures will unlikely be able to deal with the dynamics of the global economy.

The rupiah fell even deeper on Wednesday (5/9/2018), dropping to 14,927 per US dollar according to the Jakarta Interbank Spot Dollar Rate (JISDOR). The rupiah has recorded its lowest level to date for the last four days. According to Bloomberg, the currency is trading at Rp 14,925 to Rp 14,940 per US dollar on the spot market.

The country’s trade deficit is one of factors that have contributed to the rupiah’s weakening. The government has introduced five strategies to improve the trade balance: the mandatory use of 20 percent blended biodiesel (B20) to reduce fuel imports, an income tax (PPh  22) hike on imported consumer goods, increased use of local components (TKDN) in the manufacturing industry, improving certainty and ease of conducting e-commerce and the customs and excise directorate general imposing stricter control on consumer goods imports.

"Overall, the steps are expected to bring a positive, holistic impact on improving the trade balance," Coordinating Economy Minister Darmin Nasution said.

Indonesia\'s trade balance was US$3.09 billion in January-July.

On Wednesday afternoon, the government announced an import control policy and raised the income tax for 1,146 imported commodities.

Center for Indonesia Taxation Analysis (CITA) executive director Justin Prastowo said that the government’s income tax hike on imported commodities was a step in the right direction. In addition to fixing the current account deficit, higher taxes would contribute toward the revival of the domestic industry. However, periodical monitoring and evaluation was necessary for the policy to achieve its goals.

The rupiah volatility against the US dollar dragged down shares prices at the Indonesian Stock Exchange (IDX). The Jakarta Composite Index (JCI) fell 3.75 percent to close at 5,683.501 on Wednesday, the deepest since November 2016, when the index fell 4.01 percent.

The price index in the world’s stock markets generally fell on Wednesday. The price index slumped across all ASEAN stock markets, but the JCI recorded the steepest decline.

Phintraco Sekuritas analyst Rendy Wijaya said the US-China trade war had caused the US dollar to strengthen against the currencies of emerging economies, raising concerns over the countries’ economic fundamentals, including Indonesia.

Separately, Bank Indonesia (BI) Governor Perry Warjiyo said the rupiah had depreciated 7 percent since the beginning of the year. In 2015, the rupiah depreciated 20 percent and in 2013, it depreciated 25 percent.

BI deemed that the weakening rupiah still had a limited impact on inflation.

"Employers have decided to reduce their profit margins so the weakening rupiah exchange rate has not made a visible impact," Perry said on Wednesday at a working meeting with House of Representatives Commission XI.

BI monetary management head Nanang Hendarsah reminded businesspeople that the central bank had a foreign exchange hedging facility of a minimum $2 million in swap transactions. Businesses could use the hedging facility if they needed more rupiah, and they could reclaim their dollars within a certain period.

The hedging facility had only covered about $260 million in transactions so far. "We hope businesses will take the advantage of this facility," Nanang said.

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President Joko Widodo said the rupiah was not the only currency hit by external factors, such as the increase in US interest rates, the US-China trade war and the financial crises in Turkey and Argentina.

"I think the most important thing is for us to be vigilant. We must be cautious," the President said in Tanjung Priok, North Jakarta.

The President said coordination involving the fiscal, monetary and the industry sectors or businesses was necessary. "Strong coordination is key, so the program is in alignment," he said.

According to the President, Investment and exports must be increased further so the country could resolve its current account deficit problem to face the current condition.

Based on the balance of payments, the current account has seen a deficit since the fourth quarter of 2011. On an annual basis, the country has had a current account deficit since 2012. By the second quarter of 2018, the current account deficit had reached $8.02 billion, or 3.04 percent of gross domestic product (GDP).

PT Bank Permata economist Josua Pardede advised businesses not to panic in light of the continuing rupiah depreciation, as the country’s economic fundamentals and foreign debt management were much better today compared to during 1998 financial crisis.

"In 1998, the crisis that began with the Thai baht crisis was worsened by poor management of foreign debts. Most of the private foreign debts were not hedged. In addition, short-term debts were used to finance long-term and domestic businesses,” said Josua.

Josua said the 1998 private debt crisis had contributed to the rupiah’s sharpest fall, reaching 600 percent in less than a year and plunging from Rp 2,350 per US dollar to Rp 16,000 per US dollar.

Looking at Indonesia\'s fundamentals this year, added Josua, managing private foreign debt was more prudent. The central bank has encouraged businesses to hedge their foreign exchange transactions to reduce their forex risk.

(KRN/HEN/DIM/CAS/LAS/IDR)