Rupiah depreciation<\/p>\n
Foreign exchange officials at several banks have noted a new wave of
\ndollar purchases in recent weeks due to the higher pace of the
\ndepreciation of the rupiah. Although the buying has not reached the
\npoint of \"being a rush\" to the greenback, some analysts have begun to
\nnurture wild speculations about the rupiah rate, thereby prompting a
\nnumber of depositors to move their accounts to the dollar position. The
\nsituation has developed to the point that Dahlan Sutalaksana, the chief
\nof the money market at Bank Indonesia, felt it necessary to issue a
\nstrong statement to kill rumors of an impending devaluation of the
\nrupiah.<\/p>\n
The rumors of devaluation are irrational. Not only in view of the
\nrepeated assurances from Minister of Finance Mar'ie Muhammad that the
\ngovernment will not resort to what he called shocking policies, but also
\njudging from the fundamentals of the economy and the country's huge
\nforeign debts of about US$90 billion.<\/p>\n
There is not a single reason at all for the government to take such a
\ndrastic monetary measure because the fundamentals of the economy are
\nfairly sound, the foreign exchange reserves held by the central bank
\nexceeded $12.5 billion or the equivalent of five months of imports. The
\ndownward trend in the international oil prices does cause some concern,
\nbut oil now accounts for less than 30 percent of total export earnings.
\nAnd although non-oil exports also seem to have lost their robust
\nstrength, a one-shot devaluation would not provide a significant boost
\nto export competitiveness. Instead, such a move would most likely cause
\nmore damaging impacts across the economy.<\/p>\n
We, therefore, tend to believe the finance minister's assurance that
\nthe government will not devalue the rupiah but will rather, if
\nnecessary, accelerate the rate of its depreciation to prevent it from
\nbeing overvalued. We take his statement to mean that the floating rate
\nof the rupiah will follow the concept of purchasing power parity. This
\nmeans that the exchange rate will tend towards the point at which its
\ninternational purchasing power is equal. Consequently, the rate will be
\ninfluenced, among other things, by Indonesia's inflation rate.<\/p>\n
Set against this concept, we see the recent developments in the
\nrupiah rate and the shift by some depositors from rupiah to dollar
\npositions as normal and in accordance with the market trends. Obviously,
\ncurrencies will shift until domestic interest rates equal foreign
\ninterest rates, plus the expected rate of change in the currency. So
\nwhen depositors saw a steady downward trend in both the rupiah deposit
\nrate and the rupiah exchange rate, with the inflation rate already
\nexceeding 3.70 percent in the first quarter, in sharp contrast to the
\nupward trend in the American interest rate, it was only logical for them
\nto move their accounts on to dollar position.<\/p>\n
Moreover, depositors and investors expect the currencies to move at a
\nrate that is proportional to the discrepancy between the current
\nexchange rate and purchasing power parity. But because of the expected
\nhigher rate of rupiah depreciation, they saw it as more profitable now
\nto hold dollar assets rather than rupiah accounts. Thus, the trend over
\nthe last few weeks.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/rupiah-depreciation-1447898607",
"image": ""
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"sponsor": "Okusi Associates",
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