IDR NEER at record-low

While the rupiah nominal effective exchange rate (NEER) has been pretty stable since end-2013, it is currently trading at a record low, about 1% lower than the level seen in Dec13. Bank Indonesia (BI) has taken notice of this. And it is why BI has been more active in the foreign exchange market, in a bid to prevent excessive weakening of the rupiah. 

BI is no longer tolerant of a weak rupiah. High import content of domestic production means that the weaker currency continues to be a drag on GDP growth. This is particularly true for investment growth, which is likely to come in around 3.6% this year, well below its long-term average of 8%. 

What will BI do to prevent further weakening of the rupiah? There is arguably some room to run down foreign reserves. Foreign reserves remain more than 200% of short-term external debt and still provide more than 8x cover of monthly imports. But persistent intervention in the market may prove to be pointless. The practically stable NEER since end-2013 indicates that the rupiah weakness against the US dollars is pretty much a broad dollar move more than anything else. 

There has been an upward pressure on short-term rates, those for the tradable BI certificates and the non-tradable BI deposits. This may not necessarily suggest that a policy rate hike is in the offing, for such a move may not prove to be popular domestically. Yet, the impact from a rate hike on bank loans may not be that significant, given that demand for new loans is already low anyway. If a rate hike can help to attract fund inflows and anchor confidence on the rupiah, such a move may instead be a boost to overall GDP growth.