Bank Indonesia Introduced Measures to Support Rupiah

Indonesia current account deficit is expected to narrow further in 2019

Indonesia Rupiah depreciated sharply by 9.3% year-to-date to 14,930/US$ middle of this week, the weakest level seen since Asian Financial Crisis. Strengthening US$ due to normalisation process of monetary policy, along with sharp depreciation of the Turkish Lira and Argentina Peso sparked concerns of contagion effect to other EM currencies, where countries with twin deficits and relatively lower level of reserves are experiencing significant portfolio outflow from their financial markets, providing further downward pressure on their currencies.

Bank Indonesia (BI) released a statement on 30th August 2018 that the Bank is committed to safeguard rupiah exchange rate stability. The measures taken will include i) increasing the volume of foreign exchange market intervention, ii) purchasing tradable government securities in the secondary market, iii) stepping up FX Swap auctions and iv) continuously opening swap hedging windows. This week, Indonesia’s central bank governor stated the possibility of more rate hikes this year in order to aid in Rupiah stabilisation. The next MPC meeting will be held on 27th September 2018, where we expect BI may raise its policy rate by 25bps to 5.75% (5.5% currently).

Additionally, BI believe the measures will provide some stability to Rupiah, as economic fundamentals are also improving. BI projects Indonesia current account deficit to improve from 2.5% of GDP in 2018 to 2% of GDP in 2019. The projected reduction in current account deficit will be achieved via a number of Government policies, such as B20 policy (i.e. a mandatory for all vehicles to use biodiesel from 1 September 2018), where BI expects will reduce the deficit by US$2.2bn. Other measures included an expansive tourism industry, postponement of several government projects and a growth- surge of exports to around USD9-10 billion next year. These measures to stabilise the Rupiah movement and improving current account position are aimed to reduce further outflows from its capital market. While greater volatility in emerging currencies will persist in the near term, we expect these measures proposed will provide some support to Rupiah value and eventually helps the currency to stabilise.

Separately, Asean’s manufacturing Purchasing Managers’ Index (PMI) improved to 51.0 in August from 50.4 in July. IHS Markit guided that faster increases in new orders and output alongside continued jobs growth and firmer business confidence had led to August’s better PMI reading. Out of the seven countries in its survey, Vietnam, Philippines, Indonesia and Malaysia had registered increases in their PMIs, while Thailand, Singapore and Myanmar’s PMIs had contracted. Philippines’ PMI rebounded to 51.9 in August from its five-month low of 50.9 in July, while Indonesia’s August PMI expanded for the second straight month to reach its highest reading since the start of the survey in April 2011 at 51.9 from 50.5 in July.

Source: Affin Hwang Research - 7 Sept 2018