[MUMBAI] Analysts see Indonesia’s rupiah declining to a record low in the short term as political and economic worries continue to grow in South-east Asia’s biggest economy.
The currency may weaken past the 16,950 per US dollar level set in 1998, according to Mizuho Bank and MUFG Bank, amid investor unease over President Prabowo Subianto’s populist spending measures and policies. The rupiah pared losses on Tuesday (Mar 25), after it touched a three-decade low, to close at 16,595 after Bank Indonesia stepped in to support the currency.
Traders have been rattled by Prabowo’s plans to erode the central bank’s independence and his aggressive policies against foreign businesses such as Apple, with jitters running high over the nation’s fiscal outlook. US tariffs, which are set to be unleashed next week, are further denting sentiment.
“Markets are becoming increasingly concerned about growing fiscal risks in Indonesia, given the slew of social programmes that have been implemented by the new administration,” said Lloyd Chan, an FX strategist at MUFG. Foreign investors are on the sidelines and the currency could fall beyond 17,000 per greenback if US President Donald Trump delivers a tariff shock in April, he said.
Indonesian policymakers are no strangers to stepping into the market to stabilise the currency. Authorities have repeatedly said this year that they are intervening to curb volatility, while also buying bonds to support liquidity. Investors will also be watching to see if the central bank adjusts monetary policy next month to stem capital outflows or if it will allow the currency to depreciate further.
Bank Indonesia has “the FX reserves to draw a line in the sand temporarily if they wish, but it would not be sustainable when the market sentiment driving the currency weaker is so strong”, said Jon Harrison, managing director, EM macro strategy at GlobalData TS Lombard in London. “For the moment, I think they will choose depreciation as low inflation gives them some room for manoeuvre.”
Indonesian stocks have also not been spared, with the benchmark gauge falling almost 12 per cent this year to trail most of its Asian peers. Bonds are similarly under pressure, as the premium investors demand to hold 10-year notes over their US counterparts rose to the highest since September last week.
The 16,800 level for the rupiah is a “very near-term risk if the buckles are not backstopped”, said Vishnu Varathan, head of economics and strategy at Mizuho. “Beyond which, 17,000 may be the next level targeted”. BLOOMBERG
