Indonesia’s best strategy for defending rupiah would be to stick to path of reform

Source:Global Times Published: 2018/9/9 19:43:39

The best way for Indonesia to defend its currency may be to keep a cool head. A dramatic sell-off in emerging markets has pushed the rupiah to its weakest level against the dollar since the 1998 Asian financial crisis. Policymakers appear rattled, but measured approaches are available.

Jakarta is better placed to defend the rupiah than it was two decades ago. Foreign-exchange reserves are bigger and its external debt is lower. Yet a widening current account deficit means Indonesian markets have been pummelled alongside those of Argentina and Turkey. Indonesia's stock market also suffered its sharpest fall in nearly two years on Wednesday.

Local officials have been laudably proactive. Bank Indonesia has raised policy rates four times since May, by a total of 1.25 percentage points, and has regularly intervened to support the rupiah, using $13.7 billion of foreign currency reserves between February and July. Recently it has also tried to reduce the cost of hedging. The government, meanwhile, has focused on shrinking a current account deficit that is forecast by the central bank to grow to around 2.5 percent of GDP in 2018 from 1.7 percent last year.

The announced measures to squeeze that gap may help in the short term. For example, imposing biodiesel requirements could reduce the roughly 400,000 barrels per day of crude that Indonesia imports. They will do nothing, however, to revive sluggish growth or to attract much-needed foreign direct investment into the $1 trillion economy.

A better long-term fix would be continued liberalization and stable policies that help attract outside cash. More such inbound flows to the energy sector could even make Indonesia a net exporter again. Similarly, delaying some $25 billion of power plant investments hinders efforts to improve infrastructure. Without these upgrades, Indonesia might struggle to make itself a choice destination for foreign money.

Vague threats against speculators by Finance Minister Sri Mulyani Indrawati are, by contrast, unhelpful. With a dwindling number of levers to pull and an election on the horizon, politicians may be tempted to try more such rhetoric and short-term measures. Bank Indonesia expects pressure from the dollar to abate in 2019, however. More reforms and reversible steps would serve the country better until such relief comes.

The author is Clara Ferreira-Marques, a Reuters Breakingviews columnist. The article was first published on Reuters Breakingviews.

Posted in: INSIDER'S EYE

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