Has the rupiah started to rebound?
The Indonesian economy has recently enjoyed some small relief because of the “rebound” of the rupiah, after it depreciated continuously over the past several months. Having fallen to more than Rp.15,000 per greenback, the Indonesian currency gained a bit of strength in November. As of this writing, Bloomberg has reported an exchange rate of of Rp. 14,475.00 per US dollar. This exchange rate level is certainly helping markets regain confidence in the currency.
Several factors may explain the rebound of the rupiah. The first was certainly the relative predictability of US monetary policy, which helped the Indonesian Central Bank anticipate its own moves. Whenever the US Federal Reserve increased its interest rate, Bank Indonesia would respond accordingly. In fact, in mid-November 2018, Bank Indonesia acted preemptively, raising its benchmark interest rate by 25 basis points, even without an increase in the US Fed Funds rate. The response from the market was positive, which helped Bank Indonesia strengthen the rupiah. However, many economists have also started to weigh the role of the introduction of the domestic non-deliverable forward market in early November 2018. In this case, apparently the domestic NDF market also helped strengthen the rupiah against the currencies of partner countries.
One of the main problems faced by the Indonesian authorities is the current account deficit. In the third quarter of 2018 the current account deficit stood at 3.37% of GDP, from 3.02% of GDP in Q2 2018. Even though the financial and capital account of the balance of payments recorded a high surplus, the overall balance of payments still reported a higher deficit, of around $5 billion, which led the foreign exchange reserves of the Central Bank to decline to $114.8 billion as of the end of September 2018. However, the foreign exchange reserves of Bank Indonesia rose slightly in October 2018 to reach $115.2 billion.
The Central Board of Statistics released the balance of trade data for October 2018. According to the report, the Indonesian balance of trade once again reported a deficit, to the tune of $1,819.9 million. While exports rose slightly, by 5.87% to reach $15,800 million in October, imports grew faster, by 20.6%, to reach $17,619.9 million.
The Central Board of Statistics also released the inflation report, which showed relatively mild inflation for the month of October at 0.28%. With that performance, year-over-year inflation stood at 3.16%, a level at the lower end of the target corridor of the Central Bank. However, even at that level of inflation, at its Council Meeting in November 2018, the Central Bank decided to raise the benchmark interest rate by 25 basis points, to 6%, in order to reduce the level of volatility in the exchange rate against US dollar.
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