Bank Indonesia is expected to keep its benchmark rate steady. (Antara Photo/Zabur Karuru)

Bank Indonesia: Rupiah Depreciation Set to Continue This Year

BY :NASORI

FEBRUARY 16, 2015

Jakarta. The rupiah’s depreciation is set to continue this year as the currency will likely suffer from possible capital outflows once the US Federal Reserve raises its policy rate, a top central bank official said on Friday.

Bank Indonesia Governor Agus Martowardojo said the rupiah’s performance will feel a greater impact from developments in the global markets, rather than local factors.

“Internal factors won’t really have much of an effect [on the rupiah]. It’s all about external factors,” said Agus, a former finance minister and president director of state-owned lender Bank Mandiri.

He also predicted possible outflows as investors will likely begin to reduce their investments in emerging nations now that the US economy is regaining strength.

Agus declined to provide exchange rate estimates from the central bank.

The rupiah gained slightly on Friday to 12,769 against the US greenback from 12,794 the day earlier, Bank Indonesia data show. The currency has weakened 2.67 percent so far this year.

London-based financial firm Barclays revealed in a report last week that it estimates the rupiah to slide to 17-year low at 13,250 per US dollar by year end.

Despite these detrimental “external factors,” a commissioner at Indonesia’s state Deposit Insurance Corporation (LPS) speculated that Indonesia could see its Standard & Poor’s credit rating improve to investment grade in the second half of this year.

S&P is the only major international rating agency to give Indonesia a BB+ rating after Moody’s Investors Service and Fitch Ratings gave the nation investment grade status several years ago.

Fauzi Ichsan, a member of the board of commissioners at LPS, pointed out that President Joko Widodo’s fixed fuel subsidy scheme, which freed trillion of rupiah in state-spending, has received positive sentiments from S&P.

S&P executives met with Finance Minister Bambang Brodjonegoro last December to provide a favorable assessment of the Indonesia’s fiscal strengths, according to Fauzi.

However, they gave no details as to when the ratings agency will raise the country’s rating.

Fauzi, a former economist at Standard Chartered Bank’s Jakarta office, added that the battle between the police and the Corruption Eradication Commission (KPK) has not deterred global investors from taking an interest in the country.

He cited authorities' data, which show yields in the benchmark 10-year government bonds have fallen to 7.5 percent from 8 percent, while the benchmark Jakarta Composite Index reached a record high last year.

“If [foreign investors] were worried about political issues, the JCI should have gone down. They simply don’t see the ongoing conflict [between the police and the KPK] as something that would trigger a revolution or coup,” Fauzi said.

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