Central Bank to Let Rupiah Weaken Against US Dollar

Jakarta Globe, Agustiyanti & Grace Dwitiya Amianti,  July 9, 2013

The government is set to boost public spending on buildings and
infrastructure projects in the second half of this year. (JG Photo/Afriadi Hikmal)

Bank Indonesia has indicated that it will allow the rupiah to further weaken against the US dollar this year, in line with the country’s slowing economic growth.

The rupiah almost touched 10,000 against the dollar in Monday trading, bringing its depreciation to 3 percent so far this year. The weak rupiah makes it costlier for companies to import machinery and raw materials, but also boosts exporters’ earnings.

“We should give it room. We will maintain that the rupiah is stable and reflects its fundamental value,” central bank governor Agus Martowardojo said on Monday.

To defend the rupiah, Bank Indonesia has sold dollars, bringing the country’s foreign exchange reserves down to $98 billion in June. It was the first time reserves dropped below $100 billion since 2011.

Finance Minister M. Chatib Basri said the currency’s weakness was not too worrying because its decline was in line with other currencies across the region, indicating that the country’s competitiveness would not be affected too much.

“That issue is not unique to Indonesia,” Chatib said.

The Finance Ministry estimated that the economy expanded 6.1 percent in the first half, down from last year’s 6.2 percent expansion, as investment slowed due to higher costs of importing capital goods and raw materials. First-half gross domestic product data are due next month.

“We can observe an economic slowdown in the first half this year from the decline in capital goods imports,” Chatib told the House of Representatives in a meeting on Monday.

Imports of capital goods, a leading indicator for investment, contracted by 17 percent in the January-May period to $13.2 billion from a year earlier, according to the Central Statistics Agency (BPS).

Investment accounts for a quarter of the country’s gross domestic product, making it the second-biggest contributor after domestic spending, which accounts for more than half.

But Chatib said he forecast the country could still grow 6.3 percent this year, as targeted by the government, on expectations of large state spending during the second half.

Data from the Finance Ministry showed that government ministries and institutions in the January-June period have only spent 39 percent of the 2013 budget of Rp 1,726 trillion ($173 billion). In those six months, spending on infrastructure projects totaled Rp 34 trillion, or just 18 percent of an expected Rp 188.3 trillion.

Chatib told the House that the budget deficit was at 0.58 percent of GDP in the first half of 2013 and would increase in the second half to 1.8 percent, which is lower than government’s target of 2.3 percent of GDP for this year.

To boost investment in the second half, the government will simplify rules on investment, said Chatib, who also heads the Investment Coordinating Board (BKPM).

“We will simplify investment rules, such as by relaxing the negative list and the rules of the tax holiday,” he said, referring to the list that exclude certain sectors from foreign investment and the rules that grant exemptions to some investments.