A tax amnesty programme planned by Indonesia's government could potentially attract home 560 trillion rupiah ($42.38 billion) of assets stashed offshore, the central bank governor told a parliamentary commission. (Antara Photo/Puspa Perwitasari)

Jakarta. The Indonesian rupiah is heading to its weakest level against the US dollar since 1998, amid an imminent interest rate increase by the US Federal Reserve.

The rupiah traded at 12,971 to the US dollar as of 8:16 p.m. on Monday, from 12,932 to the greenback on Friday, according to data from Bloomberg. It has fallen by 4.3 percent so far this year.

The last time the rupiah traded near this level was on Aug. 14, 1998, when it reached 13,050 to the dollar.

“The big trend is still the stronger dollar against all currencies across the board,” said Aldian Taloputra, an economist at state-controlled brokerage Mandiri Sekuritas.

The dollar has been strengthening since last year on anticipation of a long-awaited Fed rate increase, possibly as early as June this year.

The US central bank has repeatedly hinted that it plans to increase its policy rate this year in line with improvements in the US economy, which is expected to trigger a capital outflow from emerging markets such as Indonesia.

In Indonesia’s case, Aldian says the main culprit for depreciation is the country’s “shallow” foreign exchange markets.

Even though Indonesia’s $850 billion economy was the 16th-biggest in the world and the biggest in Southeast Asia, its financial markets are smaller than those of neighboring Singapore.

Indonesia’s foreign exchange reserves — foreign exchange assets held by monetary authorities — stood at $114.3 billion as of January this year, a slight increase from $112 billion in December last year, according to data from Bank Indonesia.

That is dwarfed by the S$340.3 billion ($249.5 billion) held by Singapore and only marginally higher than the $111.7 billion held by Malaysia.

‘Nothing to worry about’

Bank Indonesia Governor Agus Martowardojo on Monday urged investors and the public not to worry about the weakening rupiah, saying the central bank was keeping a close eye on the exchange rate.

“We are always in the market. We will contain the volatility, so there’s nothing to worry about,” he said.

He added that the central bank had forecast the rupiah to trade within a 3-5 percent range of the 12,500 per dollar mark, or between 11,875 and 13,125.

The central bank last month announced a surprise cut to its key interest rate, the BI rate, by 25 basis points to 7.50 percent, taking a cue from the country’s easing inflation.

The central bank’s board of governors is scheduled to meet on March 17 for its next policy meeting on the BI rate.

The lower BI rate is contributing to the fall in the rupiah, says Bharat Joshi, head of investments for Indonesia at Aberdeen Asset Management. He noted that a lower key rate affected the attractiveness of the country’s assets.

Bank Indonesia is expected to cut the rate further, following Monday’s announcement by the Central Statistics Agency (BPS) showing slowing inflation in February, says Eric Alexander Sugandi, an economist at Standard Chartered Bank in Jakarta.

“We’re still waiting for the next BI rate announcement,” he said, adding that should the central bank make another cut in the BI rate, it may further weaken the rupiah.

‘Still contained’

President Joko Widodo has also weighed in on the issue in an attempt to calm the public over the rupiah’s decline.

Joko echoed Bank Indonesia’s message that the currency was still trading within the envelope projected by the central bank.

“The rupiah’s volatility is still contained,” he said at the State Palace in Central Jakarta on Monday. “The central bank mentioned this to me earlier that we’re on the right track. This is just external pressure.”

The fear is that a weakening rupiah will lead to higher costs for imported goods. Indonesia continues to be heavily reliant on imports of intermediary goods for manufacturing industries and raw materials for processed foods. A weak rupiah also increases costs for companies with high exposure to dollar-denominated debts.

Helping exports

The flip side is that the rupiah’s decline is good news for exporters and for foreign investors wishing to invest in Indonesia.

“The rupiah certainly looks undervalued at these levels, given the improving fundamentals of the country,,” said Aberdeen’s Joshi. “But the weakness does help curb imports and enable Indonesia to attract foreign direct investments over the course of the year, especially in the infrastructure space.”

And a stronger dollar means foreign investors can actually invest at a discount in the country.

Additional reporting by Ezra Sihite & Novy Lumanauw

GlobeAsia