No uplift in long term for Indonesian rupiah

Finance Minister Chatib Basri (left) and Industry Minister MS Hidayat brief journalists on Wednesday about the new fiscal incentives — that mainly center on labor intensive industries — which are part of a stimulus package to boost economic growth in Jakarta.

JAKARTA - Indonesians may have to get used to the rupiah trading at the five-digit mark against the US dollar, as monetary and fiscal authorities expect the currency to remain above 10,000 to the greenback until the end of 2014.

In his meeting with lawmakers on the proposed 2014 state budget on Wednesday, Bank Indonesia (BI) Governor Agus Martowardojo said that the rupiah could hover at between 10,500 and 10,700 throughout next year.

Such a forecast was more pessimistic than the government's. At the same meeting, Finance Minister Chatib Basri told lawmakers that the rupiah would average 10,000-10,500 throughout next year, weaker than the 9,750 per dollar assumption in the 2014 state budget unveiled by President Susilo Bambang Yudhoyono on Aug. 16.

"Our currency rate forecast of 10,500 to 10,700 per dollar is based on our study of what will be happening globally and domestically," Agus told reporters after the meeting.

"The global economy will recover next year, but there's still a possibility that the US will scale back its monetary stimulus, which will certainly affect Indonesia," he said.

A potential scaling back US quantitative easing has led to fund outflows from emerging economies, putting severe pressure on their currencies.

US Federal Reserve officials have confirmed they are "comfortable" with the plan, which has triggered a rout among currencies throughout Asia and other emerging markets.

Bloomberg data shows that the rupiah hit a four-year low of 10,955 on Wednesday at the same time as the Philippine peso and Malaysian ringgit traded near their three-year lows. India's rupee recorded the steepest drop in 20 years.

The rupiah is among the currencies heaviest hit by the fallout, having depreciated by 10.8 per cent since the beginning of this year, according to BI data.

Such a weak currency performance has been attributed to Indonesia's serious current account deficit, which swelled to a historic high level of S$9.8 billion (S$12.5 billion), or 4.4 per cent of gross domestic product, in the second quarter of this year.

The rupiah faced the risk of averaging 11,000 per dollar next year, especially as the country also had a sizeable amount of foreign debt payments that could exert further pressure on the currency, A. Tony Prasetiantono, an economist with Gadjah Mada University, said.

"The rupiah must not become too weak, trading above 11,000 [per dollar] for instance, as this would trigger imported inflation," he warned.

Given the high dependency of Indonesia's economy on imports, the safe level for the rupiah in 2014 that should be maintained by BI was around 10,500 per dollar, Tony said.

Pressure on the rupiah may also come from higher than expected inflation with BI's Agus forecasting inflation of between 8.6 per cent and 9.2 per cent by the end of this year, far exceeding the revised 2013 state budget assumption of 7.2 per cent.

High inflation would erode returns for investors holding government bonds, consequently triggering an outflow in the bond market that could further drag down the rupiah.

Given the mounting difficulties, Finance Minister Chatib Basri revised down next year's economic growth target to between 5.8 per cent and 6.1 per cent from 6.4 per cent predicted in the 2014 state budget. For this year, the economy is slated to grow 5.9 per cent from the targeted 6.3 per cent.

To maintain growth by reducing the current account deficit and support the rupiah, Chatib announced a new raft of fiscal incentives.

Chatib signed revisions to four Finance Ministry regulations (PMK). First, increasing the number of companies eligible for tax incentives in bonded-zone industrial areas; second, eliminating taxes on specific luxury goods.

The third is the removal of taxes on imported non-fiction books, while the fourth is allowing certain labour-intensive industries (textiles, garments, footwear, furniture, toys) to postpone their tax payments, to prevent layoffs in such companies.

"We do not reject the idea that there is an ongoing problem - we're not in a state of denial here," he said. "This is why we've introduced this economic stimulus package."