Rupiah Bears Excessive Economic Burden
The rupiah is deemed to be bearing an excessive economic burden. Today’s depreciation has even moved deeper than Indonesia’s economic fundamentals would justify. On Thursday (28 May), the rupiah weakened by 54 points to Rp17,855 per US dollar.
Trimegah Securities Indonesia Chief Economist Fakhrul Fulvian said the rupiah is currently in an overshooting phase, where currency depreciation exceeds levels justified by long-term economic fundamentals.
“The rupiah is currently in an overshooting phase, where its depreciation has gone deeper than what long-term fundamentals would justify,” he stated on Thursday (28 May).
According to Fakhrul, global economic pressures that typically spread across various sectors are now being absorbed more by the foreign exchange market.
Normally, rising global energy prices could trigger inflation, fiscal pressures, domestic price hikes, and currency depreciation. However, the government has opted for cautious adjustments to maintain social stability and purchasing power, causing economic pressures to concentrate on the rupiah exchange rate.
“The rupiah has become the primary shock absorber. Inflation and energy prices are being contained, but the economic pressure hasn’t disappeared—it’s shifted to the exchange rate,” Fakhrul explained.
He noted this situation makes the rupiah’s weakness appear far more pronounced than other economic indicators. The government, he said, now faces a dilemma between preserving purchasing power and maintaining external economic stability.
“If domestic prices are kept rigid while global pressures rise, the foreign exchange market will ultimately move most drastically,” he added.
Fakhrul said this aligns with the Dornbusch Overshooting theory, where domestic prices move slowly while financial markets quickly respond to global pressures and policy expectations.
He added that markets are not only assessing overall macroeconomic conditions but also testing the government’s credibility and policy consistency in handling global volatility.
“What’s being tested now isn’t just fundamentals, but credibility and policy consistency,” he said.
He explained that rupiah pressures stem from a mix of global and domestic factors. Globally, pressures come from a stronger US dollar, high US Treasury yields, geopolitical tensions, and global trade fragmentation. Domestically, markets see an imbalance between fiscal and monetary policies.
“When fiscal policy aims to keep inflation low and price adjustments are minimal, Bank Indonesia and the rupiah must work much harder,” he said.
Fakhrul said current global conditions demand a clear and credible policy adjustment roadmap to maintain market confidence in Indonesia’s economic stability.
“Markets need a clear and credible adjustment roadmap,” he concluded. (E-3)