Rupiah notes and US dollar bills being counted at a Bank Negara Indonesia branch on Jan. 26, 2015. (Antara Photo/Yudhi Mahatma)

Finance Minister Dismisses Rupiah Fears on State Budget

BY :VANESHA MANUTURI & TABITA DIELA

MARCH 06, 2015

Jakarta. The government continues to play down possible adverse effects of the weakening rupiah on the economy, emphasizing instead the positive effects on the country’s export activities in the longer run.

The rupiah fell to its lowest level since 1998 this week, declining by 4.4 percent since the beginning of the year. It strengthened slightly to 12,983 to the  dollar on Friday, data from Bank Indonesia showed. However, the currency remains 4 percent weaker than the government’s macro assumption in this year’s state budget, which works on an exchange rate of 12,500 to the dollar.

Despite this, Finance Minister Bambang Brodjonegoro said the weaker rupiah would not present much risk of expanding the state budget deficit, since the depreciation was “not by design.”

“Bank Indonesia has conducted an analysis. The effect [of the weak rupiah] would be very small. I have counted it and it was really small,” the minister said on Friday.

He added that the rupiah weakened in line with other currencies in the region as the dollar strengthens in expectation that the US Federal Reserve will start to increase rates by the end of this year.

The projected deficit in this year’s state budget is Rp 245.9 trillion ($19 billion), or 2.21 percent of gross domestic product. By law, the government must maintain the deficit at below 3 percent of GDP.

The deficit widens by Rp 3.5 trillion to Rp 4.2 trillion for every Rp 100 decline against the dollar, according to a calculation by the Finance Ministry.

But Bambang added that the rupiah’s current condition could present favorable opportunities for local industries, such as manufacturing and tourism.

Earlier, Bank Indonesia Governor Agus Martowardjojo also brushed off worries by investors and the public, stressing that the volatility was still largely contained by the central bank.

Bank Indonesia projected the rupiah to trade within a 3 percent to 5 percent range of 12,500 to the dollar this year.

A slight growth in the country’s foreign exchange reserves — typically used by the central bank to contain exchange-rate volatility — further emphasized the bank’s lax stance on the depreciated rupiah, economists said.

Foreign-exchange reserves stood at $115.53 billion last month, up 1.1 percent from $114.25 billion in January, mainly attributed to a surplus in Indonesia’s oil and gas exports.

“Bank Indonesia has noted that it is not intervening to get things back the way they were, but to contain volatility,” David Sumual, head economist at Bank Central Asia, told the Jakarta Globe on Friday. “The stronger dollar is a trend across the region, [so] BI’s stance is not surprising.”

Despite the government’s attempts to reassure the public, businesses remain worried that the condition will persist and drive operational expenses through the roof, which would force them to increase prices. They also warned that investors may lose confidence in the rupiah.

Foreign investors sold government bonds in the past week, driving the yield of 10-year bonds down by more than 30 basis points to 7.3 percent.

GlobeAsia

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