The Weakening of Rupiah and Its Impacts Towards Indonesian Economic Condition

The Weakening of Rupiah and Its Impacts
towards Indonesian Economic Condition
by: Paulina (014201400108)
Management-4
President University

1. Introduction

Currently, Indonesian economy is being tested. Its currency, Rupiah weakened to reach Rp12.475,00 (www.seputarforex.com). But it does not just stop there, rupiah could further weaken. Why could it happen? It can be caused by several things, one of which is the imbalance of Indonesia's trade balance. Recently, the government is doing a lot of food imports. Although Indonesia is known as an agricultural country rich in his produce, however, Indonesia seems not able to feed itself. Apparently, Indonesia imports number is much higher than its exports number. The weakening of the rupiah against the dollar certainly will worsen the condition of our economy.

Announcement of the trade balance of November 2014, deficit of US$ 0.42 billion (kemenkeu.go.id) makes Rupiah against the US dollar (US$) continue to be depressed. Rupiah exchange rate, Friday (01/23/2015), was closed at Rp12.475,00 per dollar, weaker than the previous day's closing which were recorded on Thursday (22/01/2015) Rp12.480,00 per dollar US.

Today (January 23rd, 2015), the reference rate Jakarta Interbank Spot Dollar Rate (JISDOR) Bank Indonesia (BI) was recorded at the level of Rp12.475,00 per US dollar. Meanwhile, according to Bloomberg data today at 10:00 am, the exchange rate was at Rp12.475 per US dollar. Daily Research of PT Samuel Securities Indonesia stated that most of the Asian currencies indeed weakened against the US dollar, but the weakening of the rupiah was the deepest weakness among other Asian currencies. This Rupiah weakening issue is caused by several things that we might aware or unaware. The cause of this issue will be explained further in this article.

[pic 1]
Picture 1.1 Rupiah Exchange Rate Graph January 2015

The weakening of rupiah currency was also affected by the release of data from the national trade balance deficit of US $ 420 million. In addition to that, the rising in inflation rate gives great contribution in pressing rupiah. Besides, as a main developing country, China plays such a big role in Asian economic condition. "Today, the Chinese manufacturing data will affect the movement of Asian currencies including dollars," said economist of Samuel Securities Indonesia, Rangga Cipta.

[pic 2]Picture 1.2 Graph of Indonesian Trade Balance in 2014

This high economic crisis is indicated by the high inflation rate. As the impacts result in inflation, a decline in savings occurs, reducing in the number of investment, the more capital taken abroad, and hampers economic growth. These impacts could be either short-term or long-term, and it will be described further in the following chapter.

II. Contents

First of all, let us understand clearly what exchange rate or foreign rate is. The price of a currency against other currencies is referred to currency exchange rate. Just like stocks, exchange rate can always change suddenly. It can change according to the news, or even rumors that often spread from unclear sources circulating about the value of the currency and the currency in the future.

Exchange Rates formed through the meeting between the forces of demand and supply in the market. We assume the US dollar ($) as the domestic currency, while the pound sterling (£) as a foreign currency. Currency exchange rates or the exchange rate between the dollar and the pound is basically the same as the number of dollars needed to buy one pound, symbol commonly used to refer to the exchange rate is R. Thus, the formula rate is R = $ / £. For example, if R = $ / £ = 2, that means we need $ 2 to buy £ 1. Graphically, R is created at the point of intersection between the demand curve and supply curve pounds.

The question now, what things influence the exchange rate to change rapidly? The exchange rate of a currency is determined by the relation of supply-demand (supply-demand law) on currency. If the demand for a currency increases, while the offer steady or decreasing, so then the exchange rate will rise. Conversely, if the offers of a currency increased, while demand remains steady or decreasing, then the exchange rate of the currency will weaken. The calculation of the changing in exchange rate is studied in advance level.

As a result of that, Rupiah is suffering rapid declining in its value. There are several causes of the collapse of Rupiah against the US dollar. Here, writer divides those factors into external and internal factors. First, the external one, one of them is US plan to reduce monetary stimulus. The decision of the Fed or Federal Reserve (US central bank) to reduce tapering off (gradual reduction of bond purchases) from US $ 85 billion per month to US $ 75 billion per month apply in January 2014 indicated the US economic recovery which strengthen US Dollar.

Next external factor is the release of a large number of Indonesian foreign portfolio investments. In this process, investors exchange Rupiah with other currencies to invest in other countries. Therefore, there is an increase in the amount of Rupiah offered. The Fed's decision to buy bonds in the financial markets (Quantitative Easing) is often referred to as the cause of the release of this foreign investment. Not to forget, the trend of economic slowdown in developing countries, such as China and India while there are economic recoveries in strong countries contributing as an external factor to this issue.

Then, we will see what internal factors that take role in affecting Rupiah’s value. First one is the deficit of the balance of payments. The deficit is due to the rate of increase in imports of goods and services are greater than exports and a surge in interest payments. The net exports (trade balance) of a country are the difference between the value of its exports and the value of its imports. If net exports are negative, exports are less than imports, indicating that the country sells fewer goods and services abroad than it buys from other countries. It’s called trade deficit. Currently, Indonesia is facing this trade deficit.

Next is the amount of imports in Indonesia. Although often referred to as an agricultural country, but Indonesia is still not able to meet its domestic needs for food, such as rice, corn, soybean, etc. This leads to a high number of Indonesian import and not optimal number of exports in Indonesia. Further, one of the most important factors is foreign debt. Indonesia carries big burden on its shoulder due to this foreign debt. Short-term and medium foreign debt causes the exchange rate is getting heavy pressure because there is not enough available foreign exchange to pay the debts’ principals and interest at maturities and it’s also caused by the weak national banking system.