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Indonesia’s best defence of its currency may be a cool head. A dramatic sell-off in emerging markets has pushed the rupiah to its weakest level against the dollar since the 1998 Asian crisis. Policy-makers appear rattled, but measured approaches are available.Jakarta is better placed to defend the rupiah than it was two decades ago. Foreign exchange reserves are bigger and its external debt is lower. Yet, a widening current account deficit means Indonesian markets have been punished alongside those of Argentina and Turkey. Its stock market also suffered its sharpest fall in nearly two years on Wednesday, ending down almost 4%.
Rates raised
Local officials have been laudably proactive. Bank Indonesia has raised policy rates four times since May, by a total of 1.25 percentage points, and has regularly intervened to support the rupiah, using $13.7 billion of foreign currency reserves between February and July. In recent days, it has also tried to reduce the cost of hedging. The government, meanwhile, has focused on shrinking a current account deficit that is forecast by the central bank to grow to around 2.5 % of GDP in 2018 from 1.7 % last year.
The announced measures to squeeze that gap may help in the short term. For example, imposing biodiesel requirements could reduce the roughly 400,000 barrels per day of crude that Indonesia imports. They will do nothing, however, to revive sluggish growth or to attract much-needed foreign direct investment into the $1-trillion economy.A better, long-term fix would be continued liberalisation and stable policies that help attract outside cash. More such inbound flows to the energy sector could even make Indonesia a net exporter again. Similarly, delaying some $25 billion of power plant investments hinders efforts to improve infrastructure. Without these upgrades, Indonesia might struggle to make itself a choice destination for foreign money.Vague threats against speculators on Tuesday by Finance Minister Sri Mulyani Indrawati are, by contrast, unhelpful. With a dwindling number of levers to pull, an;d an election on the horizon, politicians may be tempted to try more such rhetoric and short-term measures. Bank Indonesia expects pressure from the dollar to abate in 2019,however,more reforms and reversible steps would serve the country better until such relief comes.
Source : https://www.thehindu.com/todays-paper/tp-business/indonesia-can-best-defend-the-rupiah-by-staying-calm/article24906044.ece
