Indonesia not to let rupiah fall to help export

Aditya Suharmoko, THE JAKARTA POST, JAKARTA | Mon, 03/23/2009 12:59 PM

Indonesia is unlikely to follow the path taken by regional peers to allow the local currency to fall against the dollar to make exports more competitive amid slumping global demand: BI official says.

Bank Indonesia (BI) deputy governor Hartadi A. Sarwono said last Friday that such a move, usually evident when a central bank stops defending its currency against depreciation, carries risks as well.

“It (not intervening in support of the currency to cheapen exports) should be done carefully. There is no standard,” Hartadi said.

“With a (currency) depreciation, yes exports will be cheaper. But the exposure of companies to overseas debts will also be bigger. These need to be considered.”

Bloomberg reported policy makers from India, Malaysia, the Philippines, Taiwan and South Korea have let their currencies fall, reversing course on currency policy to reduce the costs of plunging exports.

Philippines’ central bank deputy governor Diwa Guinigundo said March 4 the country would not intervene to shore up the peso, while South Korea’s Finance Minister Yoon Jeung-hyun said Feb. 25 that currency depreciation might be an “engine for export growth”.

Korea’s won and Indonesia’s rupiah have been the two worst performers in Asia against the US greenback this year. The rupiah, which has weakened 7.3 percent this year, was traded at 11,760 per dollar at 4:54 p.m. Friday in Jakarta.

The World Bank has said world trade is expected to fall at the fastest rate in 80 years. BI said Indonesia’s exports might contract by between 25 percent and 28 percent this year.

In 2008, Indonesia’s exports rose almost 20 percent, to hit US$136.76 billion, according to the Central Statistics Agency (BPS). But in January, exports plunged by 36 percent from a year earlier.

Analysts Mirza Adityaswara and Helmi Arman agreed with Hartadi that a rupiah depreciation would not significantly bolster export performance, as the current export slide simply reflects lack of demand.

Mirza, the chief economist at Bank Mandiri, Indonesia’s largest bank by assets, said a rupiah depreciation would not instantly boost exports. “Demand has dropped drastically. A weakening rupiah can’t boost demand.”

He added that it might in fact undermine the country’s overall economy as most debts, including government ones, were in dollars.

Not to mention that a cheaper rupiah means imported goods will be more expensive, undermining the benign trend in the inflation rate in the past few months and reducing leeway for the central bank to keep lowering its interest rates – a key to driving economic growth.

Helmi, Bank Danamon economist, agreed, saying that export competitiveness would not be significantly affected by a rupiah depreciation. “It may even be contra-productive, considering overseas debts and (derivative) incidents in banks lately.”

“What’s important now is (the) stability (of rupiah). It should be in line with other currencies; the rupiah can’t strengthen or weaken alone,” he said.

Exports accounted for about 20 percent of Indonesia’s economy last year, according to the Central Statistics Agency (BPS).

The economy expanded 6.1 percent last year, with the 2009 state budget based on the revised assumption that this year’s growth would slow to 4.5 percent, but BI recently estimated that economic growth could fall as low as 4 percent, as the full negative impact of the global crisis has not peaked yet.