Rupiah Weakness Reflects Underlying Economic Concerns
The Rupiah exchange rate, which has weakened to a level of Rp17,600 per US dollar, is not only influenced by short-term sentiment. The weakening also reflects a combination of global and domestic pressures that are occurring simultaneously.
The head of the Macroeconomics and Finance Center at the Institute for Development of Economics and Finance (Indef), Rizal Taufikurrahman, said that the pressure on the Rupiah was triggered by the strengthening of the US dollar amid high global interest rates, geopolitical uncertainty, and capital outflows from emerging markets.
“The weakening of the Rupiah to a level of Rp17,600 per US dollar reflects global and domestic pressures that are occurring simultaneously. From the external side, the US dollar is still very strong due to high global interest rates, geopolitical uncertainty, and capital outflows from emerging markets,” said Rizal when contacted, Friday (15/5).
According to him, from the domestic side, the market has begun to pay attention to a number of fundamental factors, starting from the government’s fiscal credibility, the large need for debt financing, to the trend of declining foreign ownership in Government Bonds (SBN).
“So, the pressure on the Rupiah at this time is not just a momentary sentiment, but has begun to reflect fundamental concerns,” he explained.
Rizal assessed that the weakening of the Rupiah has the potential to have a significant impact on the national economy because Indonesia still has a high dependence on imports of food, energy, and industrial raw materials. According to him, the depreciation of the Rupiah will increase import costs, thus triggering imported inflation and suppressing people’s purchasing power, especially the lower middle class.
“The manufacturing industry is also at risk of facing an increase in production costs which can suppress business expansion and investment,” he said.
In order to face these pressures, Rizal assessed that Bank Indonesia (BI) needs to remain aggressive in maintaining financial market stability through intervention in the foreign exchange market, the Domestic Non-Deliverable Forward (DNDF) instrument, and the stabilization of the SBN market. However, these steps are considered insufficient if the pressure on the Rupiah continues to increase.
“BI also needs to create room for interest rate increases if the pressure continues to increase in order to maintain the attractiveness of domestic assets,” said Rizal.
On the other hand, the government is considered to need to maintain fiscal credibility and strengthen the policy of foreign exchange from exports of natural resources (DHE SDA) in order to strengthen the supply of domestic foreign exchange. In addition, Rizal assessed that efforts to reduce import dependence are also considered important so that the Rupiah does not continue to be vulnerable to global economic shocks.
“The government must maintain fiscal credibility, strengthen DHE SDA, and reduce import dependence so that the Rupiah does not continue to be vulnerable to global shocks,” he said. (E-4)
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