Satria Sambijantoro, The Jakarta Post, Jakarta | Headlines | Fri, February 13 2015, 7:28 AM
Economic reforms undertaken by President Joko “Jokowi” Widodo have drawn strong inflows in the equity and bonds markets, but have failed to propel the rupiah as currency investors remain skeptical on the recovery of Indonesia’s current-account deficit.
Since taking office on Oct. 20, Jokowi has cut fuel subsidies and introduced a state budget heavily focused on infrastructure, but the rupiah has fallen by more than 6 percent since he was elected, touching 12,794 per US dollar on Thursday, according to the Jakarta Interbank Spot Dollar Rate (JISDOR).
A currency rate from local banks compiled by Bloomberg reported on Thursday that the rupiah had already hit 12,820, the weakest level since August 1998.
The rupiah’s 0.6 percent depreciation was among the steepest in Asia, as both the Philippine peso and the Malaysian ringgit fell by a mere 0.1 percent, while the Indian rupee only slightly changed on Thursday.
Analysts said the fall in the rupiah was against the trend in the stock market, which had been on the rise in the past several days because of an increase in foreign purchases. The debt market has also seen an increase in foreign purchases. This year, foreign investors have increased their holdings of Indonesian bonds by at least Rp 36.5 trillion. So far in 2015, foreign investors have also posted Rp 4.8 trillion in net buys of Indonesian stocks, official data show.
Jokowi argued that the rupiah’s steep depreciation was not driven by a deterioration in the country’s economic fundamentals or investors’ doubts about his commitment to reform.
“It was mostly driven by external factors,” Jokowi told reporters on Thursday when asked about the factors dragging down the rupiah, noting the weakness in global oil prices and the potential interest rate increase in the US as major causes.
“But it is clear that our fiscal situation is now healthier, our inflation is more manageable and our trade balance has improved. Just give me time. I’ve been [President] for only three months,” he said.
Over the last few days, global investors have been jittery as a result of stalling talks over debt restructuring in Greece and its potential exit from the eurozone, with the ongoing crisis in Europe described by UK Finance Minister George Osborne as “the greatest risk to the global economy”.
“A certain risk aversion is taking hold among market players, as another episode of Greek drama plays out,” OCBC Bank economist Wellian Wiranto commented on Thursday.
“This global backdrop occurs at a time when there has been relatively little positive domestic news flow or data out of Indonesia, as well,” he added.
Other economists pointed to different domestic factors, including Jokowi’s pro-growth economic mind-set, which may pose a risk to the recovery of Indonesia’s external balance.
Jokowi has targeted the economy to grow at 5.7 percent this year, before finally hitting 7 percent within his five-year presidency, with the President planning huge spending on infrastructure projects to achieve the objective.
However, the planned infrastructure spending will invite more imports that could pose risks to the current account deficit, said Saktiandi Supaat, the head of foreign exchange research with Maybank.
Bank Indonesia, the central bank, estimated that the current account deficit could hover between 3.3 and 3.5 percent this year, higher than the estimated 3 percent of last year.
“We need to see a consistent improvement in the current account deficit to ensure the Indonesian rupiah’s strength and continued portfolio inflow,” Supaat said on Thursday.
“The removal of fuel subsidies and lower oil prices should help with the current account deficit, but risks remain and could potentially worsen.”
Supaat explained that broad US dollar strength had hit emerging market currencies, but the rupiah had weakened slightly more than others because of Indonesia’s latest political developments.
Jokowi’s handling of the appointment of officials in strategic government institutions had caused foreign investors to have doubts about the President’s leadership, he said.
original source: http://www.thejakartapost.com/news/2015/02/13/rupiah-suffers-despite-jokowi-s-reforms.html