As Trade Deficit Narrows, Rupiah Set to Strengthen

Dion Bisara

The rupiah may be set to gain ground next year, boosted by sustained investment and recovering export demand from the country’s main trading partners. 

The Indonesian rupiah was the second-worst performing currency in Asia after the Japanese yen, weakening by 6.3 percent against the dollar this year, Bloomberg data show. The performance is in line with deteriorating exports due to weak global demand and surging imports based on strong domestic consumption of capital goods and fuel.

Indonesia has had trade deficits in five months this year, including a record $1.54 billion deficit in October.

That brought the current account — or balance of the goods and services trade, income transfers and remittances — in the red for two consecutive quarters. A current account deficit means a country is a net debtor to foreign counterparts, which puts pressure on the country’s currency.

In the third quarter, the deficit stood at $5.3 billion, or 2.4 percent of gross domestic product, narrowing from a deficit of $6.9 billion, or 3.5 percent of GDP, in the second quarter. The Finance Ministry’s fiscal policy office had expected the deficit to hit 2.3 percent of GDP in the last quarter.

“This year investors were shocked by the current account swing from surplus to deficit, thus the negative sentiments towards the rupiah,” said Anton Gunawan, an economist at Bank Danamon Indonesia.

“But next year the current account deficit will narrow, and that’s a positive story,” Anton said, adding that he expected growth would pick up in exports to Indonesian trading partners such as the United States, Europe and China.

Anton said he expects the rupiah to be at around 9,500 to a dollar next year. Anton’s expectation echoed the World Bank assessment, which sees the currency at around 9,500, given a sustained positive trend in foreign direct investment. It closed Friday at 9,670 at Bank Indonesia.

“Moving into 2013, export performance will likely be dampened by an uneven global recovery and the current account deficit is projected to narrow but not to close,” the Washington-based development bank said in its report earlier this month.

“Sustaining the positive trend in FDI will therefore be key to maintaining the health of Indonesia’s external balances,” the World Bank said.

FDI in the January-September period from a year earlier rose 27 percent to record Rp 164.2 trillion ($17 billion), according to data from the Investment Coordinating Board (BKPM). Several firms, including France cosmetics firm L’Oreal, Japan’s Toyota Motor, South Korean steelmaker Posco and US truckmaker Caterpillar, made billion-dollar investments. Chatib Basri, the chairman of BKPM, expected FDI to account for a third of the expected Rp 390 trillion in total investment next year.

However, Helmi Arman, an economist at Citibank, was less sanguine. “Generally we expect the current account deficit in the coming quarters to remain larger versus incoming foreign direct investment,” he said. Helmi expected to see further depreciation of the rupiah in the next six to 12 months to 9,850 against the US dollar.

The nation’s central bank also appeared to have abandoned earlier plans to prevent the rupiah from weakening further, in order to reign in imports, which will become pricier with a weaker rupiah. Foreign reserves rose to $111.3 billion as of November from $110.3 billion in October, suggesting the central bank is resistant to using its dollar reserves to intervene in the market.

Bank Indonesia deputy governor Hartadi Sarwono told the Jakarta Globe earlier this month that the rupiah and current account would normalize next year, as the country would benefit from investments for local production of goods.

Bank Indonesia also attempted to boost dollar liquidity in the domestic market last year by allowing local banks to open trusts services. These services are expected to eliminate political risks, such as the government nationalizing the assets of oil and gas and resource-based companies.

Rupiah performance will also be supported as more foreign investors — particularly institutional ones — are persuaded to purchase bonds, based on the country’s benign inflation outlook and strong economic growth outlook next year.

Indonesia’s central bank forecast inflation to hover in the range of 3.5 percent to 5.5 percent next year. The government predicts the economy to expand by 6.8 percent next year, driven by private consumption.

As Trade Deficit Narrows, Rupiah Set to Strengthen

As Trade Deficit Narrows, Rupiah Set to Strengthen
The rupiah may be set to gain ground next year, boosted by sustained investment and recovering export demand from the country’s main trading partners.