Bank Indonesia is too late to save rupiah

For the local market players, the rupiah rate of 10,000 per US dollar is a sacred and crucial psychological threshold.

And that’s what Bank Indonesia (BI), the central bank, has failed to protect. The rupiah has ultimately hit the five-digit this week, a situation that some define as a perception of crisis. It happened mostly because BI apparently underestimated the magnitude of rupiah’s pressure in June, a period when the demand for dollars is usually at its heights due to surging companies’ earnings repatriation and foreign debt payments.

In April, the US-based JPMorgan Chase, a major player in foreign exchange (forex) business here, already reprimanded BI that foreign investors were beginning to become nervous about the availabilityof dollars in the upcoming months.

 In May, newly-appointed Finance Minister Chatib Basri warned that uncertainty over fuel subsidies could trigger massivecapital outflow, which could put pressure to the rupiah.

But BI stood still, keeping its monetary stance unchanged. The fruit of such negligence might be seen today, when both the aforementioned warnings become reality, with the rupiah’s sharp downswing already sending jitters to the market and prospective investors.

Under the leadership of Darmin Nasution, the central bank actually succeeded in coping with the escalating pressure of the rupiah in January, when BI was forced to heavily intervene in the market, splashing $4 billion of its forex reserves to prevent the rupiah from breaching the 10,000 barrier. The rupiah might already break the psychological level without the intervention, economists say.

And there are still weakening threats from offshore speculators using the rupiah as their wager. In January, an investigation in Singapore concluded that the rupiah rates there were actually manipulated by some banks, which colluded before submitting their respective rates, in order to reap short-term profits.

Facing escalating pressure for the rupiah, BI took action by hiking its overnight deposit facility rate (Fasbi) rate by 25 basis points to 4.25 percent on Tuesday evening. Hiking the rate would support the rupiah as BI could absorb excess liquidity in the market, as higher Fasbi rate means that lenders now have more incentives to make overnight deposits in the central bank.

But, isn’t this a step that is taken too late? Since beginning of the year, economists have warned that the spread between Fasbi and BI rate (now 5.75 percent, unchanged for 15 consecutive months) might be too wide, expecting a swift adjustment to support the under-pressure rupiah.

In fact, if BI had hiked its Fasbi rate one or two weeks earlier, the pressure for the rupiah might be well anchored, hence a strong possibility that the currency might have been still safe at 9,700-9,800 level at the moment.

The weakening rupiah is a threat for future inflationary pressure, as imported goods would soon become more expensive. Besides, it is worth noting that BI will most likely fail to meet its annual inflation target of 5.5 percent, with the central bank already forecasting that inflation this year could top as high as 7.8 percent due to the impending fuel price hike.

Weak rupiah is also a deterrent for bonds investors, who might find investing in Indonesia's bonds market as no longer attractive as their profits shrunk due to currency loss.

 Nevertheless, it’s not fair to blame BI too much from the current situation. The central bank should not be the one holding the biggest responsibility for the recent mess – BI, in fact, has been carrying way too heavy burden of maintaining stability at times when the government’s stupidity continues to systematically cripple the economy.

The pressure to the rupiah stems from the persistently high current account deficit, which continues to widen because of soaring oil imports. President Susilo Bambang Yudhoyono actually could solve the situation by hiking fuel prices (he has the authority to adjust fuel price without parliamentary approval), yet he remained undecided on the issue.

At times when our economy is facing challenging moments like this, the President even reshuffled its economic team, replacing Darmin with new Governor Agus Martowardojo in May.

With rupiah now heading into vicious depreciation cycle, that decision turned to be a howler: looking at Darmin’sreputation as an astute economic forecaster, there is strong possibility that he would be able to manage the situation better compared to Agus, who is still adjusting with his new life in BI.

With deliberation of fuel price hike is still ongoing, the hardball lies not only in BI, but also in the hands of the President and his fellow politicians in the House of Representatives.

And this time, they had better not be late. The uncertainty must be ended very soon to safeguard our economic sustainability, looking at how foreign investors now running away from the country in such rapid, alarming pace.

Surely we do not want massive capital outflow and exchange rate overshooting to continue, wrecking the economic fundamentals that we have carefully built since the 1997 financial crisis destroyed them all. 

This article was published in The Jakarta Post on Thursday, June 12 2013