1. 26 Aug 2013
Rupiah Depreciates Amid High Current Account
Deficits
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The Indonesian rupiah continued to depreciate against the US Dollar in July,
breaching the IDR10,000/USD on 15 July 2013 for the first time since early
September 2009. As of the end of July, the rupiah traded at IDR10,278 USD.
Bank Indonesia (the central bank) has intervened to stabilise the rupiah from
excessive volatility and stem the fall in foreign-currency reserves, which declined
to USD92.67 billion during July 2013 from USD98.10 billion in June 2013 and
USD105.15 billion during the previous month. Indonesia’s international reserves
have been on a general downward trend since their recent high in August 2011
when a total of USD124.64 billion was recorded. Bank Indonesia would argue that
its present reserves coverage (in terms of imports) are within international
adequacy standards, although these ratios have fallen; as of June 2013,
international reserves amounted to approximately 6.3 times total imports
compared to 7.0 during January 2013 and 8.3 in August 2011.
The depreciation of the Indonesian rupiah follows a widening current account
deficit during the second quarter of 2013; the deficit widened to USD9.85 billion
compared to USD5.82 billion during the previous month. Bank Indonesia expects
that the present wave of depreciation will help stem this trend as imports become
dearer, enhancing the competitiveness of its industries, at least in the long run.
However, Bank Indonesia recognises that both weaker global demand and
domestic demand mean that growing exports may take some time to translate
into stronger economic growth.
Indonesia’s depreciating rupiah is also a sign of the wider region-wide currency
depreciation, prompted by the US Federal Reserves’ indication that it will scale
back its quantitative easing (a lax monetary policy aimed at boosting liquidity).
Previously, the cash injection by the Federal Reserve has allowed cheap dollars to
flow into emerging economies, including those in Southeast Asia, allowing them to
finance large current account deficits. However, as foreign investors begin
withdrawing their investments in favour of safer asset classes (particularly US
fixed income instruments), emerging economies – including Indonesia – will find
themselves hard-pressed to finance their current account deficits. In Indonesia,
the current account deficit amounted to 4.36% of nominal GDP as of the quarter
that ended June 2013, widening from a deficit of 2.63% of GDP during the
previous quarter. Indonesia last reported a net surplus (amounting to 0.34% of
GDP) during the third quarter of 2011.
At present, Bank Indonesia has indicated that the depreciation of the rupiah is
presently in line with macroeconomic fundamentals, although it will continue to
intervene to prevent volatile exchange rate movements. Indeed, sharply reduced
international reserves (at least in absolute terms) mean that Bank Indonesia is
more likely to allow the currency to depreciate, intervening only to avert pernicious
movements on its foreign exchange market.
Contributed by W. Meytha, CEIC Analyst
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