Economist: Indonesia's economic orientation must be 'outward looking' to strengthen the Rupiah
Jakarta (ANTARA) - Senior economist Didik J. Rachbini believes that Indonesia’s economic systems and policies must be outward-looking, strengthening the external sector to make the Rupiah exchange rate more stable and strong.
He stated that Indonesia requires more business transactions that generate significant income from abroad, rather than relying solely on domestic consumers. A highly dominant domestic economy only results in more internal circulation of the Rupiah.
“Meanwhile, the economy needs to develop export-based economic policies that will bring in large amounts of US dollar foreign exchange reserves. This is what Indonesia truly needs to support a strong exchange rate,” Didik said in a statement in Jakarta on Sunday.
According to Didik, the Indonesian economy, which revolves around a domestic circle based on a large population and middle class, has been a fundamental weakness thus far. When Indonesians purchase products domestically, it primarily represents internal economic circulation within the Rupative basis.
He does not deny that the scale of these activities creates jobs, benefits companies, and drives Gross Domestic Product (GDP) growth. However, because it does not bring fresh foreign exchange into the country, the exchange rate remains vulnerable because its foundation is solely a dominant domestic economic system.
“With an inward-looking economic structure and a weak outward orientation, it is natural that Indonesia’s foreign exchange reserves are among the weakest compared to other ASEAN countries,” said Didik.
Indonesia’s foreign exchange reserves were recorded at approximately US$145.3 billion at the end of July 2024. Didik noted that this figure is insignificant compared to the reserves of small nations like Singapore, which holds around US$426.2 billion. Thailand, whose currency plummeted in 1998, has foreign exchange reserves twice that of Indonesia at around US$279.2 billion, while Malaysia, despite its small population, holds approximately US$132.6 billion.
“For a country as large as Indonesia, foreign exchange reserves of this size are not enough and are even too small to serve as an external buffer,” Didik explained.
With a large domestic market, he also admits that the Indonesian economy can continue to grow even if the Rupiah continues to depreciate. “But, without a foundation of competitiveness in the overseas sector and relying only on the domestic market foundation, there is no hope for Bank Indonesia to make the Rupiah stable and strong over the next five years. Especially if they only play with interest rate policy instruments,” he said.
Didik reminded that Indonesia possesses natural blessings that have the potential to be foreign exchange earners. Exports of coal, palm oil, and nickel bring large amounts of foreign exchange to Indonesia. However, exporting such raw or semi-finished commodities depends heavily on price increases.
“These commodity exports perform very well when global prices are high. However, Indonesia itself is still not a price-setter for these commodities,” he said. He added that commodity prices will always fluctuate, and when they drop, the Indonesian economy faces pressure due to the lower inflow of foreign exchange.
At the same time, Indonesia still requires foreign exchange to import capital goods and raw materials for domestic needs. This condition weakens the exchange rate and is a factor that may prevent Bank Indonesia from being able to improve the currency value.
On the other hand, Didik added, foreign investment, which should be a factor in strengthening the exchange rate, will not always feel comfortable in Indonesia. According to him, many factors act as hindrances, such as corruption, issues with legal certainty, and high transaction costs.
He stated that Indonesia is in great need of foreign capital because such investment brings fresh foreign exchange. However, investors have many other emerging market options. “The perception of investment risk in Indonesia is not well-maintained, so investors think twice before entering Indonesia. If other countries offer a better business environment and more trusted laws, investment funds could flee and move to those nations,” said Didik.
Based on a thorough analysis of the monetary, real, domestic, and external sectors, Didik predicts that Bank Indonesia will face difficulties in improving the Rupiah exchange rate to be more stable and stronger over the next five years.