Global and local effects determine rupiah prospect

JAKARTA. The rupiah exchange rate against the US dollar has been under pressure after the US presidential election. The Fed’s plan to raise its interest rate has also brought negative sentiment to rupiah.

On Tuesday (29/11), Rupiah exchange rate against the US dollar in spot market was opened at the level of Rp 13,536 per US dollar. However, rupiah depreciated to the level of Rp 13,547 per US dollar in the afternoon.

BI (the Central Bank) predicts that in average, rupiah exchange rate in 2016 will be lower than the earlier predictions.

The document of BI’s exposure at working meeting with Commission XI of the House of the Representatives (DPR or Parliament), Tuesday (29/11), reveals that rupiah exchange is expected to hit the level of Rp 13,300 per US dollar. Previously, BI expected that the rupiah exchange rate will be ranging between Rp 13,300-Rp 13,600 per US dollar.

BI even predicts that rupiah exchange rate against the US dollar will be Rp 13,280 per US dollar in 2017. Previously, BI predicted that in average, rupiah exchange rate in 2017 will be ranging between Rp 13,200-Rp 13,500 per US dollar.

The 2017 exchange rate is stronger than the average exchange rate in 2016, thanks to tax amnesty policy. The prediction is even more optimistic than the assumption of 2017 State Budget that stands at Rp 13,300 per US dollar.

Governor of BI Agus Martowardojo said that the rupiah exchange rate is mostly affected by the uncertainty in the US future. All are adopting wait and see stance to Trump’s policies, which will be reflected on the composition of his cabinet.

In terms of The Fed’s plan to increase the interest rate in the mid-December, BI is sure that it has been priced in therefore it will not bring significant impact to rupiah.

Agus predicted that the weakening rupiah is only temporary, as rupiah will be more stable in 2017.

Tax amnesty effect

Economist at Maybank Indonesia Juniman said that the rupiah exchange rate at the end of the year will depend on global and domestic conditions. However, the stronger rupiah will very depend on the realization of tax amnesty program by the government.

From the global side, the rupiah exchange rate movement is related to market expectations on Trump’s policies, as well as The Fed’s monetary policies. On the domestic side, he continued, rupiah exchange rate will depend on the amount of repatriation funds from tax amnesty program.

The repatriated funds will increase the liquidity in financial market. However, rupiah is likely to remain stronger, despite the repatriation funds are lower than the expectations.

As information, it is expected that about Rp 140 trillion repatriation funds will flow to domestic market by the end of the year. To date, the realization just amounted to around Rp 42 trillion.

Juniman also saw that BI’s intervention to rupiah exchange rate was not as much as before the meeting of governor board on 17 November. “BI has intervened, but it adapted with the market condition. If the regional markets weaken, BI is unlikely to launch massive intervention,” he said.

As information, when rupiah was weakening in this week, BI has intervened foreign exchange market, government bonds market, and swap market. Therfore, Juniman predicted that rupiah exchange rate will stand at the level of Rp 13,300 per US dollar in 2017.

The Head of Fiscal Policy Agency Suahasil Nazara said that to date government is unlikely to revise the target of rupiah exchange rate for this year, as well as the prediction on rupiah exchange rate in 2017. According to Suahasil, the average rupiah exchange rate during the recent months have not yet affected to the average exchange rate for along the year. Meanwhile, the government will revise all macro economy assumptions during the meetings on 2017 Revised State Budget.

The government claimed to have built coordination with BI and Financial Service Authority (FSA) related to the recent economic conditions. Under the recent condition, liquidity in financial market remains stable, despite the repatriation funds have not yet fully realized. Therefore, the rupiah exchange rate will remain stable.

(Muhammad Farid/Translator)