Offshore rupiah weakness: Economist says rupiah bears heavy economic pressures

“If domestic prices are kept rigid while global pressures rise, the foreign exchange market will ultimately move most extremely,” said Trimegah Securities Indonesia Chief Economist Fakhrul Fulvian, adding that the rupiah is bearing significant economic pressures as its exchange rate weakened past Rp17,800 per US dollar in offshore markets. Speaking in Jakarta on Thursday, Fakhrul explained that under normal circumstances, rising global energy prices would pressure inflation, fiscal conditions, domestic prices, and the exchange rate. However, when domestic adjustments are made cautiously to maintain social stability and purchasing power, the pressure shifts more to the rupiah. “The rupiah has become the primary shock absorber. Inflation and energy prices are contained, but economic pressures remain; they shift to the exchange rate,” Fakhrul explained. He added that the current situation aligns with the Dornbusch Overshooting theory, where rigid domestic prices coupled with rapid financial market movements cause exchange rates to fluctuate far more than fundamentals would suggest. “Inflation that should manifest in various areas is instead being borne largely by the rupiah,” he said. He noted this phenomenon commonly occurs in developing countries that prioritise short-term domestic price stability. Fakhrul acknowledged that the decision to delay energy price adjustments is understandable from social and political perspectives, but the consequence is economic pressure becoming more concentrated in financial markets. “If domestic prices are kept rigid while global pressures rise, the foreign exchange market will ultimately move most extremely,” he added. He noted Indonesia’s economic fundamentals remain relatively strong compared to many other developing nations. “Markets are watching whether Indonesia has a strong enough policy anchor to navigate a new global era of heightened volatility and inflation,” he said. Furthermore, Fakhrul clarified that what is being tested now is not just economic fundamentals, but also policy credibility and consistency. He acknowledged global factors are also pressuring the rupiah, including geopolitical tensions, trade fragmentation, a stronger US dollar, and high US Treasury yields. He also noted that sudden policy communications amid poor market sentiment have exacerbated uncertainty. “When fiscal policy aims to keep inflation low and price adjustments are minimal, Bank Indonesia and the rupiah must work much harder,” Fakhrul said. The rupiah weakened past Rp17,800 per US dollar in offshore markets during the domestic holiday for Eid al-Adha 1447 Hijri on Wednesday (27 May) and Thursday (28 May).