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Indonesia's weakening rupiah raises concerns

24 july 2012, 11:16
0
©AFP
©AFP
Indonesia's weakening rupiah and widening current account deficit are raising concerns about Southeast Asia's largest economy, which is struggling against contagion from the global crisis, AFP reports.

The rupiah has declined more than nine percent in the past 12 months, the most drastic drop in Asia after the plunge in India's rupee, which hit an all-time low in May.

Bank Indonesia (BI), the nation's central bank, has intervened to strengthen the rupiah, selling US dollars to banks and offering term deposits to stop dollars leaving for safe havens abroad.

"If the rupiah continues to weaken it will create an economic slowdown," said Lana Soelistyoningsih, an economist at the University of Indonesia.

"A weakening rupiah will raise inflation, increasing the price of imported materials and slowing productivity," she said.

But Manulife Asset Management analyst Kenny Soejatman said that BI's interventions on behalf of the rupiah have been effective.

"The issue of an unstable rupiah is over now, and people are realising that Bank Indonesia actually knows what it's doing in promoting growth for the country," Soejatman said.

For Indonesia the year began on a positive note after a meritorious 2011, which marked the fastest growth in 15 years, of 6.5 percent, and a record $20 billion in foreign direct investment.

Investors have swarmed to Indonesia for its population of 240 million and fast-growing middle class, rich natural reserves and political stability. The country also won its second investment-grade credit rating status in January.

Ratings agency Moody's retained a stable outlook on Indonesia's economy Monday but noted "a pause" in the external payments position.

A negative tilt in the balance of trade is adding downward pressure on the rupiah, Moody's assistant vice president Christian de Guzman said.

Struggling economies in Europe and the United States are affecting demand for commodities.

"Weaker external demand has had an effect on commodity prices, as well as demand for Indonesian commodities, so we're seeing exports slowing," de Guzman said.

The World Bank noted zero growth in first-quarter real exports, and forecast a current account deficit of $7.9 billion this year, already recording three consecutive quarters in deficit.

Indonesia's current account has largely stayed in surplus since the 1997-98 Asian financial crisis, with some marked exceptions including in 2008 at the onset of the global crisis.

Adding fuel to the fire are Indonesia's heavy energy subsidies that have had a "distortionary effect on the demand for oil, given that Indonesia exports crude oil and imports finished products", de Guzman said.

"The subsidies prop up demand for petrol in cars, and the balance of trade is pressured by that."

Portfolio investors have complained that BI was reckless in cutting the interest rates to an all-time low of 5.75 percent in February, despite seeing no signs of consumption cooling.

The World Bank reported first-quarter investment growth of 0.3 percent from the previous quarter, in seasonally adjusted terms, far below the 5.2 percent growth in last year's fourth quarter, the strongest since mid-2004.

The stock market has grown two percent in the past six months but has been outperformed by neighbouring countries, with the Philippines and Thailand both growing by more than 10 percent during the same period.

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