The Indonesian rupiah has slid almost 10% against the USD since the beginning of the year, reaching a century-low. The deepening of the current account deficit and the contagion from investor risk aversion vis-à-vis emerging markets explain it. To stem one of Asia’s biggest currency drops in 2018, the Bank of Indonesia raised last August, for the fourth time since May, its benchmark interest rate to 5.5%. Given the rupiah’s continuing negative trend, import taxes on hundreds of consumer goods have been increased and the use of biodiesel has been boosted – to curtail fuel imports – while Finance Minister Mrs Indrawati is contemplating tightening the foreign exchange regulation which forces exporters to keep their export receipts in the country.

Impact on country risk

The current account deficit has been widening in 2018 and could end up around 2.5% of GDP (from 1.7% in 2017) at the end of the year. This is explained by increased imports of more expensive oil – Indonesia became a net oil importer in 2011 – and of capital goods needed for many infrastructure projects.

The monetary climate shaped by rising US interest rates and a strong USD has hit countries through  the emerging market sell-offs that began last spring. Given this enhanced risk aversion climate – expected to last for some time –, Indonesia’s exposure to capital outflows, and the general elections scheduled for next April, pressures on the rupiah may continue and compel the authorities to take extra measures to support its currency. This may entail further interest rate hikes, increase support to economic nationalism that favours domestic production and could potentially lead to some capital controls. Also, some infrastructure projects could consequently be delayed. This being said, optimism still prevails at this stage. In similar past episodes detrimental to emerging markets, Indonesia showed resilience. A floating rupiah, sound macroeconomic management and good fundamentals including adequate foreign exchange reserves (close to 6 months of imports) – albeit on a downward trend – provide confidence in Indonesia’s capacity to absorb and overcome the current turmoil hitting emerging countries. Unless the situation further deteriorates and spreads to the whole emerging world, Credendo does not plan any rating changes in the coming months.

Analyst: Raphaël Cecchi – r.cecchi@credendo.com