Rupiah Depressed, IPB University Economics Expert Outlines Factors Causing It
The rupiah exchange rate against the US dollar has weakened in recent times. This condition is influenced by a number of factors, both domestic and foreign. What are they? Check out the explanation of IPB University’s Faculty of Economics and Management (FEM) lecturer, Dr rer pol Deniey Adi Purwanto below.
Domestic Factors: Fiscal Policy and Market Uncertainty
Dr Deniey said, one of the main factors in the weakening value of the rupiah against the US dollar at this time is investor concern of the government’s fiscal policy.
“The government’s plan to launch the Free Nutritious Meal (MBG) program, which has a large budget, has triggered concerns regarding Indonesia’s fiscal sustainability,” he said.
In addition, President Prabowo’s supposedly controversial statements regarding the stock market also created uncertainty in the capital market. As a result, investors tend to withdraw their funds, further depressing the rupiah exchange rate.
“Indonesia’s dependence on imported goods and services is also a factor in weakening the rupiah. This condition causes a current account deficit, which increases the demand for foreign currency to finance imports,” he explained.
Furthermore, he said, Indonesia still relies on foreign capital flows to cover fiscal and current account deficits. When global economic turmoil occurs, foreign investors tend to withdraw their funds, which then exacerbates pressure on the rupiah exchange rate.
External Factors: US Tariffs and Dollar Strengthening
Dr Deniey said that the reciprocal tariff policy implemented by the United States also influenced the weakening of the rupiah exchange rate. The US government, under President Donald Trump, imposed high tariffs on imported goods, from various countries to the United States, including China, Indonesia, and a number of other countries. This move triggered global trade tensions and put pressure on Indonesian exports.
“The rise in US bond yields is also a significant external factor driving up demand for the US dollar,” he said. Rising yields on 10-year US government bonds attract capital outflows from developing countries, including Indonesia.
“In turn, it encourages the weakening of the rupiah exchange rate,” he added. He also added that the increase in benchmark interest rates by the Federal Reserve (The Fed) also led to a strengthening of US dollar demand.
Impact of Rupiah Weakening: Positive and Negative
According to this IPB University Monetary Economics Expert, the weakening of the rupiah exchange rate against the US dollar has both positive and negative impacts on the Indonesian economy.
However, the negative impact tends to be more dominant, especially if the depreciation of the rupiah exchange rate occurs continuously or for a long period of time.
The negative impacts include an increase in the price of imported goods, pressure on inflation, an increase in the foreign debt burden, capital flight, and a decline in market confidence.
“The increase in the price of imported goods can trigger inflation and reduce people’s purchasing power. Indonesia’s foreign debt burden, both government and private, in US dollars will also increase so that it will also have an impact on the sustainability of the government budget, and private sector finances,” he said.
However, he said, the weakening of the rupiah exchange rate can also encourage increased exports as Indonesian goods become cheaper on the international market. In addition, foreign exchange from migrant workers and tourism also has the potential to increase.
“However, this positive impact will not be maximized if the production capacity of the domestic industry is limited, dependence on imported raw materials is high, and there is economic uncertainty,” he said.
Rupiah Stabilization Efforts: Short and Long Term Policies
This lecturer in Economics at IPB University said that the Indonesian government and Bank Indonesia need to take steps to stabilize the rupiah exchange rate.
“Short-term policies include intervention in the foreign exchange market, interest rate policy (raising the BI Rate), controlling inflation, strengthening foreign exchange reserves, and limiting nonproductive imports,” he said.
Meanwhile, medium- and long-term policies focus on strengthening economic fundamentals, including improving export competitiveness, encouraging domestic and foreign investment, strengthening energy and food security, encouraging tourism and remittances, and improving financial literacy and inclusion.
“The policy mix is not only fiscal and monetary but also policies related to foreign exchange and industry are important to strengthen the fundamentals of the rupiah exchange rate in the medium and long term,” concluded Dr Deniey. (US) (IAAS/NRA)
