Economists Say Rupiah’s Gains Are a Strength

Dion Bisara & Muhammad Al Azhari | October 13, 2010
The rupiah is in a strong position compared with other currencies. (Antara Photo/Rosa Panggabean) The rupiah is in a strong position compared with other currencies. (Antara Photo/Rosa Panggabean)

Jakarta. While some of the world’s biggest economies spar over their currencies, Indonesia is in the unique position of enjoying the benefits of a stronger rupiah, although an all-out currency war could tempt the central bank to put off interest rate hikes, economists say.

Economists said a strong rupiah was mostly positive for the country, because most of its exports were commodity based, and because the stronger currency helped exporters who imported capital goods for production.

“I think, as a whole, the impact of a stronger rupiah on Indonesia’s economy is actually a plus, as local businesses benefit from cheaper capital imports,” said Gundy Cahyadi, an economist at Singapore’s Oversea-Chinese Banking Corp.

With investors pouring money into Indonesian assets in search of higher returns than those available in developed economies, the country’s currency has appreciated 5.2 percent this year.

“Indonesia’s export competitiveness is unlikely to be hurt significantly by rupiah appreciation as its export base is primarily comprised of commodities with relatively inelastic demand in global markets,” said Ma Tieying, from DBS Bank in Singapore.

Erwin Aksa, chairman of the Indonesian Young Entrepreneurs Association (Hipmi), even said that now was the time for businesses to expand because of the cheaper import costs.

“The capital market could also be strengthened with all this inflow, which is a good situation for companies aiming to build their capital,” he said.

While Erwin said the strong rupiah was good for the country, he added that the government and central bank should work to reduce volatility in the currency.

Some analysts also see a number of disadvantages from the inflow of money into the country.

Anton Hendranata, an economist at Bank Danamon in Jakarta, said in light of a weakening dollar, Bank Indonesia would be reluctant to raise its benchmark rate, currently at a record low 6.5 percent, to avoid more capital inflows seeking higher returns.

OCBC’s Gundy warned that the rupiah’s big gains could create problems if the situation turned volatile.

“The main threat is the excessive pace of this strengthening of the rupiah, because should there be any instability in global markets, there will be a reversal in the rupiah and this may be damaging to Indonesia,” he said, drawing parallels to the 1997-98 Asian financial crisis.

The central bank and Finance Ministry are yet to show any major concern over the issue.

Finance Minister Agus Martowardojo told Reuters on Tuesday that capital inflows were still at an acceptable level and the government would not yet be seeking to impose restrictions.