Indonesia: Indonesian rupiah continues downward slide
August 21, 2013
The Indonesian rupiah (IDR) traded at 10,685 per USD on 19 August, which was 6.0% weaker than the level registered on the same day of the previous month. The figure follows the 3.6% decline recorded in July. The IDR's value against the U.S. dollar has now fallen to its lowest level since April 2009. On a year-to-date basis, the rupiah has lost 10.9% against the USD.
The currency's downward trend, which began in mid-2011, has been driven by a combination of factors, including the slowing of economic growth, rising inflation, and falling exports. Concerns over the potential impact of the US tapering its monetary stimulus, along with Indonesia's rapidly widening current account deficit, have pushed the devaluation even further in recent months.
The Central Bank raised its BI rate for the first time since February 2012 at its 13 June meeting. The move was made in part as an attempt to take some pressure off of the rupiah. Subsequently, the Central Bank raised the BI rate an additional 50 basis points in July. The Central Bank left the rate unchanged in August, but it did boost its secondary reserve requirement from 2.5% to 4.0%. This macro-prudential policy requires lenders to set aside more funds in government and central bank bonds, and is designed to contain inflation and to provide support for the weakening rupiah.
On 23 August, the Indonesian government announced that it was considering plans to address its weakening economy, the falling rupiah, and an unprecedented widening of the current account deficit. The measures would aim to reduce oil imports, and would include new taxes on imported luxury cars and products, as well as incentives to promote investment in the agricultural and metal sectors.
FocusEconomics Consensus Forecast panellists expect the rupiah to trade at 10,054 per USD by the end of this year. For 2014, the panel projects the rupiah to trade at 9,867 per USD.
Author: Carl Kelly, Economist