The recent broad-based fall in Asian currencies signals a challenging outlook for the rupiah in 2015, giving a short illustration of a potential scenario that could play out when the US central bank moves to tighten its monetary policy next year.
Investment banks from Morgan Stanley, Goldman Sachs to BNP Paribas have warned their clients to prepare for the rupiah's depreciation to 13,000 per US dollar next year, as the US Federal Reserve's move to hike its interest rates would trigger capital outflows in the region, weakening the Indonesian currency.
The 2015 state budget assumes that the rupiah will trade at 11,900 per US dollar.
Last week, the rupiah touched 12,318 per dollar, its weakest level since the 2008 financial crisis, at a time when the Malaysian ringgit plunged to a five-year low while the South Korean won tumbled to its weakest level in more than a year.
Policymakers have said the recent weakness in the rupiah is driven by external factors, rather than a deterioration in local economic fundamentals.
"The dollar is now strengthening against almost all currencies," Bank Indonesia (BI) Senior Deputy Governor Mirza Adityaswara told The Jakarta Post over the weekend.
"There's nothing wrong here, as the weakness in the rupiah wasn't the result of capital outflows," he said.
Last week, the dollar strengthened following an announcement that the US economy generated 321,000 jobs in November, higher than most analysts' expectations.
The US unemployment rate now stands at 5.8 percent, and Fed officials have previously signaled that a possible interest rate increase will be warranted when the rate falls below 6 percent, which many economists perceive will be the sign of a fully fledged, structural recovery in the US.
"With the US Federal Reserve's monetary policy cycle positioned as it is, there's a great deal of uncertainty regarding the 2015 outlook for capital flows to emerging markets," said Huw McKay, a Sydney, Australia-based economist with Westpac Bank.
BNP Paribas analysts warned their investors that the Indonesian currency market had an "uneasy equilibrium" as portfolio inflows remained a necessary source of the country's basic balance-deficit financing.
"The 'taper tantrum' was the dog that didn't bark in 2014. But that does not mean the risk of a sharp currency devaluation has disappeared," BNP Paribas analysts Jennifer Kusuma and Mirza Baig wrote in a note to their clients.
"The currency beta is not likely to help US dollar-funded investors," they noted.
"We recommend foreign investors to go in fully foreign exchange-hedged."
Negative sentiment on the rupiah also stems from the potential stalling of economic reforms in Indonesia, with the Golkar Party likely to remain in opposition after incumbent Aburizal Bakrie recently retained his chairmanship.
"The news dims hopes that Golkar will join [...] the Great Indonesia Coalition, which would give that coalition a legislative majority," said Tim Condon, an economist with ING Group, referring to the coalition that backs President Joko "Jokowi" Widodo.
"Politics is the source of two-way risk to all financial asset prices."
Local analysts, however, were more upbeat on the rupiah outlook given the recent improvement in Indonesia's economic fundamentals that should support the currency.
The recent increase in subsidized fuel prices and the falling prices of global oil would shrink Indonesia's current-account deficit, the major worry among foreign investors, to only 2 percent of gross domestic product (GDP) next year, according to Faisal Basri, an economist from the University of Indonesia.