Rupiah hits four year-low

The rupiah plunged to a four-year low on Friday as fears over the reduction of the US monetary stimulus and surging demand for the US dollar continued to drag down the local currency.

The rupiah fell 0.9 percent this week to 11,730 per dollar as of 3:20 p.m. in Jakarta, after touching 11,736 earlier, the weakest level since March 2009, according to prices from local banks compiled by Bloomberg. Thailand’s baht slid 0.8 percent to 31.84 and Malaysia’s ringgit dropped 0.4 percent to 3.2157.

Bank Indonesia’s (BI) move to raise its key interest rate by 25 basis points to 7.5 percent this month to lure foreign inflows apparently had little impact to shore up the currency, which this week touched Rp 11,736 per dollar earlier, the weakest level since March 2009.

BI Governor Agus Martowardojo attributed the depreciation trend of the rupiah to the minutes of the US Federal Open Market Committee’s (FOMC) meeting released this week, which revealed that the reduction of its bond-buying stimulus could take place in the “coming months”.

“[The minutes of the] FOMC meeting affects all currencies across the globe, so if there’s any weakness in the rupiah at present, we see it as something that is still rational,” Agus told reporters in his Jakarta office on Friday.

BI, which recently loosened its market intervention and opted to pile up its foreign exchange (forex) reserves instead, reaffirmed its commitment of not steadfastly holding the currency at a certain mark.

“We do not want to target the currency at a certain level — the present currency rate has reflected the fundamentals of our economy,” Agus said.

Nevertheless, he said that BI would remain vigilant because the rupiah would normally see “heavy” pressure before the turn of the New Year due to the high dollar demand for companies’ foreign debt payments and earnings repatriation.

The rupiah, which has depreciated by more than 17 percent year-to-date, is among the worst performers in Asia, as Indonesia’s high current-account deficit triggered heavy sell-offs among foreign investors, who were already anxious over the prospect of tighter US monetary policy.

Indonesia’s current-account deficit stood at US$8.4 billion in the third quarter, equivalent to 3.8 percent of gross domestic product (GDP). Agus told reporters that BI aimed to push down the current-account to a more sustainable level of between 0.2 to 2.5 percent of GDP.

The high current-account deficit would make the rupiah and the Indian rupee “the first [two currencies] in the firing line” when the US Federal Reserve started tapering its monetary stimulus, according to London-based research firm Capital Economics Ltd.

“The rate increases that we have seen in Indonesia should make a difference, but it is going to be a while before they take effect,” Capital Economics analyst Gareth Leather said

The demand for dollars, both for debt and import payments, is traditionally high at the end of the year. According to BI data, the amount of the foreign debt payments in October and December reached a total of $21.02 billion. About $18.89 billion will come from the private sector and another $2.13 billion from the government and the central bank.

Lana Soelistianingsih, an economist with PT Samuel Aset Manajemen, noted that the rupiah faced intense pressure this week because importers were buying dollars as they feared that the currency might weaken further in December on high demand for the greenback during the month.

She expected BI to prioritize currency stabilization and perform intervention gradually, but warned the central bank to closely monitor developments so that the rupiah depreciation would not spiral out of control.

“With sizeable amount of imports in the economy right now, could you imagine if the currency suddenly traded at 12,000 per dollar?” Lana said. “That would really hurt the real sector and pose risks to the economy.”