Bank Indonesia’s (BI) policy measures and a narrowing current account deficit (CAD) will likely support the rupiah amid unfavorable financial market conditions, however risks remain as Indonesia continues to record new COVID-19 cases while facing limited healthcare capacity, experts warn.
Fitch Solutions has revised it outlook for the rupiah for 2020 to 15,500 per US dollar from its earlier projection of Rp 16,750 after the recent gains the currency booked. The rupiah appreciated 13 percent from a recent low of Rp 16,575, a level unseen since the 1998 financial crisis, to Rp 14,610 on Monday, Bloomberg data show.
“We believe that BI’s policy measures will continue to cushion the rupiah in the short-term,” the researchers said. “Moreover, a forecast narrowing in CAD in 2020 due to slightly cheaper imports, will also add to investors’ confidence in Indonesia’s fundamentals.”
The central bank has taken several measures to stabilize the rupiah, including by direct intervention in foreign exchange markets, purchase of government bonds in the secondary market worth Rp 166.2 trillion (US$11.34 billion) and strike currency swap lines with major central banks including a $60 billion repurchase agreement with the US’ Federal Reserve.
“Dollar liquidity and BI’s bond market activity will help attract foreign investors back to the bond market in the short-term horizon, which will provide support to the currency,” Fitch said.
The country recorded a CAD of US$3.9 billion, or 1.4 percent of gross domestic product (GDP) in this year’s first three months, down from 2.8 percent of GDP in the previous quarter. Fitch Solutions expects the CAD to reach 2 percent of GDP this year, much lower than the 3.4 percent in a previous forecast, providing a lift to foreign exchange reserves that will help support the rupiah.
Fitch Solutions, however, warned that the downside risks from COVID-19 could further erode the rupiah’s recent gains if the situation spiraled out of control, adding that downside risks remained elevated over the long-term due to a widened budget deficit.
“The Indonesian government’s initial mismanagement of the COVID-19 outbreak led to a collapse in investors’ confidence in the country’s assets, including the rupiah,” it said.
“Downside risks will continue to emerge from the COVID-19 outbreak in Indonesia. As we have noted, cases across Indonesia continue to rise at a rapid pace and the country has limited healthcare and financial resources to deal with a widespread outbreak.”
The central bank now expects the currency to further gain against the greenback to “pre-pandemic levels” at around Rp 13,600 to Rp 13,800 per US dollar, BI Governor Perry Warjiyo said. It decided to hold its benchmark interest rate last week at 4.5 percent to maintain financial market stability.
“We maintain our view that the rupiah remains fundamentally undervalued and will strengthen to reflect its fundamentals,” Perry told reporters in a streamed news conference on May 28.
BI recorded a net outflow of $5.7 billion in the first quarter as foreign investors dumped Indonesian assets. From April 1 to May 14, however, the central bank booked $4.1 billion in net inflows, mainly in sovereign debt papers.
The COVID-19 pandemic threatens the stability of Indonesia’s financial system, as it has weakened the country’s financial industry and macroeconomic outlook, as well as brought economic activity to a standstill, the Financial System Stability Committee (KSSK) said earlier this month.
Economists have warned that nationwide loan restructuring programs and economic risks caused by the pandemic may tighten liquidity in several small banks and lead to higher non-performing loan ratios in the medium term, leaving banks in need of additional liquidity.
Bank Central Asia (BCA) chief economist David Sumual said the central bank should aim to stabilize the currency to support the country’s weakening economic activity, adding that the rupiah’s fundamentals were currently around Rp 15,000 per US dollar.
“The rupiah’s stability is the priority right now as the currency should be favorable for importers and exporters,” David told The Jakarta Post. “An over-strengthened rupiah may discourage economic recovery in the real sector.”