Indonesia’s Weakening Rupiah Causes Headaches for Businesses

By webadmin on 06:53 pm Jun 28, 2012
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Dion Bisara & Francezka Nangoy

Ichiro Suganuma could only shake his head as he talked about the rupiah’s ongoing slide against the dollar. “It’s giving me a headache,” he said.

As the president director of Panasonic Gobel Indonesia, Suganuma oversees the import of raw materials for the company’s factories producing televisions, air conditioners and digital cameras. The dollar strengthening against the rupiah means higher local costs for the company, a unit of Japanese electronics manufacturer Panasonic.

“For the export business it’s good, but for the local sales it’s bad,” Suganuma said. “The cost for raw material increases. About 70 percent to 80 percent of our raw material is imported. When the rupiah weakened from 9,000 to 9,500 [to the dollar], our costs increased about 5 percent.”

Suganuma’s concerns underlie the problems faced by many manufacturers in Indonesia that get their sales denominated in rupiah but typically finance purchases of overseas goods with dollars. Some economists predict further declines.

The rupiah’s depreciation has been mainly due to foreign investors pulling funds out of high-yield assets in emerging markets, including Indonesia, amid concerns Europe’s sovereign debt crisis will deteriorate further. Spain has asked for a bank bailout and Greece came close to rejecting austerity measures.

The rupiah is the second-worst performing currency in the Asia Pacific this year, after the Indian rupee, according to Bloomberg data.

The rupiah strengthened 0.1 percent to 9,470 per dollar on Tuesday, but overall it has weakened 4 percent this year, according to data from Bank Indonesia. The central bank has spent some of its foreign-exchange reserves defending the rupiah. The reserves dipped to $111.5 billion in May after peaking at $124.6 billion in August.

The government assumed the rupiah to trade at 9,000 against the dollar this year in the revised state budge submitted to the House of Representatives in March, slightly weaker than the average of 8,779 in 2011. The rupiah has lost 70 percent of its value after the currency was floated in August 1997.

“The comfortable level for me would be about 9,000 to 9,200. If it remains at the level it is now, we might need to increase the selling price” of Panasonic Gobel’s products, Suganuma said. “However, because competition is so fierce right now in the electronics business, we can’t really increase the selling price.”

Consumers have already this year indicated frustration at mooted price increases for gasoline and electricity prices, and more widespread price rises have the potential to fuel social unrest.

Mark Tan, an executive director at Goldman Sachs’ Global Investment Research, said the rupiah could weaken to 9,800 per dollar in the next three months before recovering to 9,400 and 9,200 within 12 months. A year ago it traded at 8,623.

“The main issue with the rupiah is more of a liquidity issue. Foreign ownership and the size of local bond markets have grown in recent years, posing challenges to management and depth of onshore US dollar liquidity,” Tan said.

Anton Gunawan, an economist at Bank Danamon Indonesia, revised his rupiah forecast to 9,200 against the dollar, from 8,950 initially, saying that Europe’s debt crisis “is still long and winding.”

“The market pressure will be temporary. Indonesia’s economy will still hold its ground, supported by strong domestic demand. Now it’s a matter of a sufficient policy response to improve the credibility of the central bank and the government,” Anton said.

Bank Indonesia spokesman Dody Budi Waluyo says the central bank believes that once Greece shows positive development, investors would return to investing in emerging markets, such as Indonesia.

“BI will always be in the market to maintain the stability,” he said.

In a conference call with economists last month, the central bank forecast the country’s balance of payments — a broad measure of transactions between Indonesia and the rest of the world — would record a surplus of $2 billion in the second quarter, with around $4.4 billion net inflows on the financial account covering the $2.4 billion deficit in the current account.

In the first quarter, Indonesia’s balance of payments recorded a deficit of $1 billion as export growth slowed to about 7 percent year on year due to sluggish demand from Indonesia’s main trading partners, including the United States and countries in Southeast Asia and Europe.

Even though a weak rupiah should help exporters, the net gain from the currency’s decline may be limited because shipments might fall amid slowing demand from Europe, China and the United States. Recent data show that manufacturing in China continues to contract, while European nations face austerity measures that limit economic growth, and recovery in the United States is choppy.

Tire maker Multistrada Arah Sarana is keeping its sales growth target at 30 percent this year, company director Yohanes Ade Bunian Moniaga told the Jakarta Globe on Tuesday.

Multistrada expects sales to reach Rp 3.72 trillion ($394 million) this year, up from Rp 2.86 trillion in 2011. Approximately three-quarters of its sales come from overseas. The company is seeking to expand its sales in the Middle East, Africa and Latin America amid weak demand in the United States and Europe.

Toto Dirgantoro, chairman of the Indonesian Exporters Association (GPEI), said the group’s members were hampered by weak demand, except for agricultural-based products like rubber and textiles.

“Exports, except staple products, will definitely weaken. That’s why we need to expand our markets,” he said.

There are signs, though, that investment in Indonesia has not been affected by the weakening rupiah.

Sigit Prasetya, managing partner at Singapore-based private equity fund CVC Asia Pacific, which has a controlling interest in Matahari Putra Prima, said: “In investing, I think it will depend on the risk appetite. The rupiah is quite weak right now, we want to see it stronger, but we’re still investing.

“In our department store business, our revenue is in rupiah, and we have very little exposure to the dollar. So, we have no problem there.”