Rate Moves Fail to Save Rupiah as Deficit Stays: Southeast AsiaNeil Chatterjee and Novrida Manurung
The Indonesian rupiah’s decline to a four-year low this week adds to evidence that two interest-rate increases and the first fuel-price boost in five years haven’t done enough to curb Indonesia’s current-account deficit.
The central bank said yesterday it sees the rupiah moving to a new equilibrium, after the currency slid 1.3 percent. The rupiah weakened further to 10,260 a dollar today, the lowest level since July 2009, according to prices from local banks. It will probably reach 10,340 by the end of 2013, according to the average prediction as of today by the four most-accurate rupiah forecasters of the past year.
“It looks to be more of a case of too late rather than too little,” said Wellian Wiranto, an investment strategist at the wealth management unit of Barclays Plc, which sees the rupiah at 10,800 by mid-2014. “While the host of measures they have adopted have been laudably decisive and helpful, they simply take time to work.”
Southeast Asia’s biggest economy has suffered capital outflows even after policy makers increased the benchmark rate by 0.75 percentage point and raised subsidized fuel prices in the past two months. With elections next year making further moves to reduce subsidies more difficult, officials may have to rely on higher borrowing costs and a weaker rupiah to cool demand for imports that spurred a record $24 billion current-account gap in 2012.
“Indonesia needs it to curb import demand,” said Mirza Adityaswara, chief executive officer of Indonesia Deposit Insurance Corp., referring to a weaker currency. “Raising rates will give an impact to the economy but Indonesia needs a slow economy to narrow the current-account deficit.”
The current-account shortfall leaves the country vulnerable to volatile global capital flows, Wiranto said.
Foreign direct investment into Indonesia rose 18.9 percent last quarter from a year earlier, the smallest gain since 2010, the investment coordinating board said yesterday. At the same time, domestic investment surged 59.1 percent. Rising local investment has fueled demand for capital imports and contributed to the current-account deficit.
The rupiah has fallen more than 7 percent in the past 12 months, making it the worst performer after the yen among 11 Asian currencies tracked by Bloomberg. Foreign funds have pulled about $3 billion from Indonesian stocks and $1.8 billion from rupiah-denominated government bonds since May 22, when U.S. Federal Reserve comments spurred speculation it may reduce stimulus, according to data compiled by Bloomberg.
A rupiah level of about 10,000 isn’t a cause for concern and will help make the trade balance healthier, Bank Indonesia Governor Agus Martowardojo said July 17. The monetary authority sees a need to take steps against faster inflation and to narrow the current-account gap, he said.
The currency plunged the most in 13 months yesterday in onshore trading, as Bank Indonesia allows a more rapid slide toward levels quoted in the offshore market. The central bank has allowed the rupiah to gradually depreciate, especially this month, Deputy Governor Perry Warjiyo said July 12.
“It looks as though Bank Indonesia has finally accepted that it can’t hold the rupiah below 10,000 without burning an unacceptable level of reserves and indeed a controlled depreciation remains the best way of trying to keep the current-account deficit in check,” said Robert Prior-Wandesforde, a Singapore-based economist at Credit Suisse Group AG.
The most accurate rupiah forecasters in the past year were Citigroup Inc., Macquarie Group Ltd., HSBC Holdings Plc and Barclays, according to Bloomberg rankings. Currency forwards show traders are betting on further depreciation in the rupiah. One-month non-deliverable forwards were weaker than the spot rate at about 10,480 today.
Rising wealth and investment has spurred economic growth above 6 percent for more than two years, leading imports to climb 8 percent last year, according to government data. That came as exports fell 9.8 percent because of weak prices for commodities such as crude oil, gas and coal.
Indonesia sought to cut its import bill by lifting subsidized fuel prices in June, a move that Finance Minister Chatib Basri said would strengthen the rupiah to meet the government’s target for the currency to average 9,600 per dollar this year.
The central bank’s next move could be further increases in interest rates, said Fauzi Ichsan, an economist at Standard Chartered Plc in Jakarta.
“Indonesia needs to raise rates again in August or September by 25 basis points, and 25 basis points in the fourth quarter, to make foreign investors interested in investing in Indonesia,” he said. “Right now Indonesia needs more capital inflows to reduce the current-account deficit.”
The shortfall may reach $20 billion this year and the current account will remain in deficit next year as no near-term rebound of commodity prices is in sight, he said.
Reducing the deficit in the longer-term will require re-tooling the economy to manufacture higher value goods for export, increasing productivity and improving infrastructure, steps that the government is starting to take, said Gundy Cahyadi, an economist at Oversea-Chinese Banking Corp. in Singapore.
Indonesia is encouraging investment in iron, steel, and petrochemicals production to cut dependence on imports, the country’s Industry Minister Mohamad S. Hidayat told Bloomberg TV Indonesia in an interview yesterday. The country is also tackling food imports by trying to grow more rice, build sugar mills, and boost output of products such as chocolate.
“The current-account deficit is increasingly a structural problem that cannot be solved by monetary policy alone,” Cahyadi said.