The Indonesian currency dropped to nearly Rp 13,000 per US dollar on Friday after Bank Indonesia (BI) Governor Agus Martowardojo said the central bank would tolerate a weak rupiah.
“We must be prepared for circumstances in which the rupiah depreciates, given the strengthening trend of the US dollar,” Agus told reporters at BI’s headquarters in Jakarta on Friday.
He reiterated the central bank’s commitment to intervene in the market to stabilize the rupiah, but added that he would not go against the tide if other Asian currencies also weakened against the dollar.
The central bank wants to see an improvement in the competitiveness of Indonesian exporters, said Agus.
The rupiah dropped after the BI governor showed a willingness to let it continue on its downward trend. On Friday, the rupiah touched 12,948 per US dollar, its lowest since November 2008, before it appreciated slightly to close at 12,928, or 0.7 percent lower than a day earlier, after the central bank intervened by supplying the market with dollars.
If the rupiah strengthened while other currencies in the region weakened against the US dollar, “that could result in serious repercussions for the Indonesian economy”, the BI governor said.
Senior deputy governor Mirza Adityaswara wrote in a text message on Friday that BI would intervene in the market if the currency’s depreciation was too steep.
The rupiah’s current real effective exchange rate — an inflation-adjusted value of the rupiah relative to other major currencies — was already undervalued, he told The Jakarta Post after the rupiah dropped to Rp 12,900 per dollar. The current rate is already “compatible” with attempts to improve Indonesia’s current-account position, he added.
Last week, BI cut its interest rate by 25 basis points to 7.5 percent, in a surprise move that analysts said was a deliberate strategy to weaken the rupiah to boost exports. The rupiah has weakened by more than 1 percent since the interest rate cut.
“Bank Indonesia is apparently quite comfortable having a rupiah rate that is weaker than its fundamental, weaker than its fair value,” David Sumual, the chief economist of Bank Central Asia (BCA), said by phone on Friday.
BI wanted to have a weaker currency because central banks across the globe were now engaged in a “currency war”, a practice where monetary authorities deliberately depreciate their currencies to boost exports and improve competitiveness, David explained.
Analysts from investment banks such as BNP Paribas, Goldman Sachs and Morgan Stanley expect that the rupiah will fall below 13,000 per dollar this year as they argue that Indonesia’s large current-account deficit will spark bearish sentiments on the currency.
The rupiah would weaken to 13,000 per dollar in the first half of the year, but it had a chance of strengthening in the second half when the US Federal Reserve clarified its outlook on the US interest rate, said Wisnu Wardhana, an economist from CIMB Niaga.
“However, the rupiah could see further depreciation pressure if the BI rate is lowered again,” Wisnu said on Friday. “Lower rates could invite more imports, thus affecting the outlook of our current-account deficit.”
BI has estimated that the deficit in the current account — the broadest measurement of trade, which includes exports, imports, services and transfers — could reach 3 percent of gross domestic product (GDP) this year, slightly higher than its 2014 figure of 2.95 percent.
However, BI’s executives have assured investors that the structure of Indonesia’s current-account deficit would be healthier this year, as most of the imports would be used for productive purposes, such as infrastructure spending, rather than fuel subsidies like last year.
This year, President Joko “Jokowi” Widodo has earmarked Rp 290 trillion for infrastructure projects classified as capital expenditure (capex) spending in the 2015 State Budget, up from Rp 190 trillion last year.
original source: http://www.thejakartapost.com/news/2015/02/28/bi-tolerates-depreciation-rupiah.html