Unmoved in the Midst of Dollar Deluge
Yopie Hidayat (Contributor)
RUPIAH should be much stronger than its current position, which stubbornly remains at around Rp14,000 per US dollar. It should had been the case if we considered various determinant indicators for rupiah’s up and down. All these indicators have looked good recently. Yet still the rupiah refuses to thrive.
Indonesia’s current account balance, for example, had a surplus of US$960 million in Q3 of 2020. For the first time since 2011, Indonesia is enjoying a quarterly current account surplus. This is a huge leap from the same quarter in the previous year, which was minus US$4.5 billion.
The positive current account balance was caused in part by the improved trade balance. There was a US$9.8billion dollar surplus in exports. In the same quarter last year, that surplus was only at US$1.36 billion. The improved exports come at the same time as a fall in imports due to weak demand caused by the Covid-19 pandemic. But it turns out that the improved export performance could not move the rupiah.
Dollars are also coming in from other channels besides the trade balance surplus. Since the start of 2021, the inflow of dollars through portfolio investment and debt has been quite substantial. In early January, the government sold global bonds with a total value of US$2.5 billion and €1.5 billion. The additional foreign reserves earned through this fresh debt should increase the supply of dollars in the domestic market. Just like it has always done, this large injection should have boosted the value of the rupiah significantly. But it did not.
The inflow of foreign capital is also going strong into rupiah denominated government bonds. Since the start of the year until February 10, foreign investors purchased a net of Rp18.29 trillion in rupiah-denominated government bonds. This is more or less equivalent to US$1.3 billion. And still, this massive inflow of capital had no effect on the rupiah.
In the stock market, foreign investors are also coming in rapidly. Since the start of the year until the Chinese New Year in mid February, net purchases by foreign investors jumped to Rp11.46 trillion, around US$ 818 million. This is quite a large injection in a period of less than one and a half months. And here, there is also no push for the rupiah.
The deluge of foreign currency is clearly reflected in Indonesia’s foreign reserves position. At the end of January 2021, Indonesia’s foreign reserves reached US$138 billion, its highest all-time record. These vast reserves are more than enough to fulfill dollar needs for import and government debt repayment for the next 10 months, far above the minimum international standard of three months. News of this record also had virtually no effect on the rupiah.
Investors seem to be considering other factors that will bear down on the rupiah. One of them is the uncertainty of economic recovery due to the worsening trend of the Covid-19 pandemic. Meanwhile, the vaccination program that the government is so reliant upon to answer the pandemic will only be complete by March 2022.
The pandemic response has created a gigantic hole of deficit in the government budget. In 2021, the government must look for additional funding of up to Rp1,006 trillion, around 5.7 percent of the gross domestic product. Such a dire need of funds will financially corner the government in the market for this year, for it is the party that desperately needs money.
A rupiah that refuses to appreciate will also pose problems for Bank Indonesia (BI) in setting their benchmark interest rate. This week, the BI board of governors will reconvene to make a decision. In January, the BI refrained from lowering interest rates in consideration of the rupiah exchange rate, so that no more pressure is added to it.
That same issue still plagues BI now. Low inflation should be a supporting factor for BI to cut the interest rate. However, could it stand to let the rupiah lose even more value after it cuts the interest rate? This is the push and pull that will continue until we reach the light at the end of the dark tunnel towards Indonesia’s economic recovery.