Deep Rupiah Depreciation Unlikely, Thanks to Sound Economy: Bank Indonesia

The rupiah weakened to 13,473 against the US dollar on Wednesday (21/12) from 13,393 on Tuesday, according to data from Bank Indonesia. (JG Photo/Safir Makki)

By : Tabita Diela | on 10:18 PM December 15, 2016
Category : Business, Economy

Jakarta. The US Federal Reserve's decision to increase its benchmark interest rate is unlikely to cause a collapse in the value of the rupiah due to strong fundamentals, a senior executive at the central bank said on Thursday (15/12).

The rupiah has strengthened by 3 percent against the dollar so far this year and traded at 13,367 on Thursday, according to Bank Indonesia's Jakarta Interbank Spot Dollar Rate.

"We expect [that the rupiah] will not reach 14,000 against the dollar," Bank Indonesia executive director of economy and monetary policy Juda Agung told reporters.

The US Federal Reserve raised interest rates by 25 basis points on Wednesday and indicated more increases were likely next year on the back of an improving economy.

A note from Moody's Investors Service said past announcements by the Fed related to tapering in 2013 and a rate increase in 2015 affected capital flows to and from emerging markets.

Indonesia experienced a sharp exchange rate depreciation in 2013 when the rupiah plunged more than 20 percent after the Fed announced that it would reduce its bond-buying practice.

"If I compare the current condition with the one in 2013, it is so much different," Juda said.

He said several indicators, including a low current-account deficit, manageable inflation, strong economic growth and sufficient foreign exchange reserve made it unlikely that the rupiah would depreciate strongly.

Indonesia's current-account deficit is currently at 1.8 percent of gross domestic product, compared to 4.2 percent in 2013, Juda said. He expects the deficit to stay below 2 percent of GDP until the end of the year.

Juda said inflation, which currently hovers around 3 percent, is far lower compared to the 8 percent in 2013. The central bank expects inflation to remain within a band of 3 percent to 5 percent this year.

Indonesia's foreign exchange reserves stood at $111.5 billion in November, which is sufficient to cover 8.5 months of imports or 8.1 months of imports and foreign debt repayments, Bank Indonesia said in a statement earlier this month.

The central bank expects economic growth to reach 5 percent this year and around 5 percent to 5.4 percent next year.

"Bank Indonesia will continue to monitor the risk of a sudden capital reversal linked to the ambiguous US policy direction and implement exchange rate stabilization measures in line with the rupiah’s fundamental value by maintaining market mechanisms," Bank Indonesia executive director Tirta Segara said during a press conference.

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