Interest Rate Hike Could Become the Short-Term Solution

The Indonesian currency has been fluctuating between Rp 14,800 and Rp 14,900 per US dollar for the past two weeks. As the solution, BI needs to immediately raise the benchmark interest rate in order to halt the outflow of foreign funds and lure them back into the country.

KOMPAS/RADITYA HELABUMI

Atmajaya University rector Prasetyantoko (right) and UOB Indonesia economist Enrico Tanuwidjaja speak in a Kompas panel discussion with the theme "Halt the Weakening of Rupiah Exchange Rate" in Jakarta on Friday (14/9/2018). Other speakers included Indonesian Palm Oil Producers Association (Gapki) chairman Joko Supriyono, Bank Indonesia monetary management department head Nanang Hendarsah and economist Faisal Basri (not shown).

JAKARTA, KOMPAS — The rupiah exchange rate is still unstable. The Indonesian currency has been fluctuating between Rp 14,800 and Rp 14,900 per US dollar for the past two weeks. As the solution, Bank Indonesia needs to immediately raise the benchmark interest rate in order to halt the outflow of foreign funds and lure them back into the country.

Meanwhile, related stakeholders also need to use a non-market approach in dealing with investors, exporters and importers. On the other hand, exports need to be further promoted by raising the palm oil trade and implementing a trade barter scheme.

For the medium and long term, the current account deficit, which is the main cause of the weakening of the rupiah, needs to be addressed more seriously. If not, Indonesia will remain vulnerable to crisis, especially when there are external shocks.

These views were raised during Kompas\' economic panel discussion with the theme "Halt the Weakening of Rupiah Exchange Rate" in Jakarta on Friday. Speakers in the discussion included Nanang Hendarsah, the head of the monetary management department of Bank Indonesia (BI); A Prasetyantoko, a lecturer at Atma Jaya Catholic University in Jakarta; Enrico Tanuwidjaja, the chief economist of Bank UOB Indonesia; Faisal Basri, a lecturer at the economics department of the University of Indonesia; and Joko Supriyono, the chairman of the Indonesian Palm Oil Producers Association (Gapki).

Faisal said the external pressure on the rupiah was getting stronger. The United States Federal Reserve (the Fed) is expected to further raise its benchmark interest rate on Sept. 26. This will make US government bond yields more attractive, which could trigger the withdrawal of a large amount of foreign funds from developing countries.

"If the Fed raises the benchmark interest rate, BI needs to respond with the same move by raising its benchmark interest rate by 50 basis points. The current interest rate of 5.5 percent will not be able to support the rupiah," Faisal added.

Based on the Jakarta Interbank Spot Dollar Rate (JISDOR) on Friday, the rupiah further weakened to Rp 14,835 per US dollar from Rp 14,794 per dollar on the previous day. In the spot market, the rupiah closed at Rp 14,805 per US dollar, up 0.24 percent from the previous day\'s closing level.

Prasetyantoko said foreign exchange (forex) liquidity had begun to tighten due the massive outflow of foreign funds. On the other hand, the country\'s forex reserves have been largely used to stabilize the rupiah exchange rate, pay dividends, interest on foreign debt and finance imports.

The tight liquidity of the forex is the current short-term problem. For this reason, relevant stakeholders need to find ways to ensure that forex liquidity will not continue to tighten.

"For example, dividend payments can be delayed by one or two months. Non-market approaches can also be used in dealing with related business players. The goal is to halt the decline in forex reserves," said Prasetyantoko.

Nanang Hendarsah said forex supply to the domestic forex market was decreasing. As an indicator, the sales of export earnings of the country’s 20 largest exporters dropped significantly to US$20 million in August from about $120 million July, this year.

The decline in the sales of export earnings is in line with the withdrawal of foreign funds from the domestic capital market. Foreign investors\' selling spree in the bond market in July caused the prices of government debt papers (SBN) to decline by 0.9 percent.

"Although at a limited scale, exporters have begun to sell their export proceeds at the interbank spot rate. However, the amount is still unable to cover foreign currency purchases for imports, and for payments of the SBN coupons to foreign investors. The net purchases of foreign investors of the government debt papers reached Rp 331 billion," he said.

Structural reform

Nanang also hopes that the foreign investors’ ownership in the government debt papers can be reduced and gradually replaced by domestic investors. At present, the ownership of foreign investors in SBNs reaches 37 percent.

"In addition, Indonesia also needs to increase export-oriented foreign direct investment. So far, the orientation is still mostly on the domestic market," said Nanang.

Enrico said the current global uncertainty could become the right momentum for the government to reform fundamental issues. The current account deficit, which has taken place since the fourth quarter of 2011, occurs because the structural reforms that had been made were not optimal.

Basic and manufacturing industries must be immediately addressed so that they will not further worsen the current account deficit. Amid the rising tension resulting from the lingering trade war between the US and China, trade negotiations also need to be improved.

"If the US imposes tariffs on Chinese products worth $200 billion, Indonesia can be affected because there is a possibility that the US will impose the tariffs on commodities that have so far received a special tariff. If that happens, the tariff that is now below 5 percent could be increased to 25 percent," he said.

Meanwhile, Joko Supriyono said exports of crude palm oil (CPO) and its derivative products have the potential to be increased. However, it could be hampered by trade barriers currently imposed by a number of countries and regions, such as the European Union, India and Africa.

In India, the import duties for CPO and its derivatives are very high, reaching 49 percent and 59 percent, respectively. This caused CPO exports to India to fall by 29.63 percent year-on-year in July.

"If you wait for negotiations, it will take a long time. The government should reduce export levies to 10 to 20 percent so that CPO and derivative products will be more competitive in the Indian market," he said.

Faisal said in trade negotiations, Indonesia needs to implement a trade barter scheme. The scheme could be applied to trade with China because trade deficit with the country was the largest among Indonesian trade partners.

(HEN)