The country’s central bank, Bank Indonesia had to step in to stop the loss, ending the rupiah value at 16,595 to the US dollar when the market closed.
Political instability in Indonesia, mixed with global uncertainty over the US trade war, caused the rupiah to hit a 27-year low.
On Tuesday, the rupiah dropped 0.54% to 16,642 per US dollar in the morning trade, marking its largest decline since March 2020 (when it was 16,550 against the US dollar). The currency has fallen more than 3% this year, making it one of the poorest performers in the emerging markets.
The rupiah’s worst market performance occurred in June 1998, when it fell to 16,800 to the dollar.
The snow slide forced the country’s central bank, Bank Indonesia, to step in to stop the loss, ending the rupiah value at 16,595 to the US dollar when the market closed, down 0.24 percent from Monday’s level.
Fitra Jusdiman, director of monetary and securities asset management at the central bank, stated that the central bank will continue to take proactive mitigative measures to maintain stability in the rupiah currency rate. It would also preserve the supply and demand for foreign exchange.
Fitra accused the most recent decline in rupiah was due to US President Donald Trump‘s tariffs and Middle East tensions.
Josua Pardede, chief economist at private lender Bank Permata, claimed that investors may buy the US dollar ahead of Eid, which marks the end of the fasting month of Ramadan, due to anticipating uncertainty around Trump’s trade war.
Pardede stated that the rupiah depreciation was also caused by the decline in prices of Indonesia’s primary export goods, including coal, palm oil, and nickel, increasing the predictions that Indonesia’s current account deficit would worsen this year.
Except for 2020 and 2021, Jakarta, Indonesia’s capital, met its budget-level threshold of no more than 3% of gross domestic product (GDP), as mandated by Indonesian law.
Analysts warned that President Prabowo Subianto’s schemes of free lunches to students could have threatened its fiscal responsibility and widened the budget deficit.
Bhima Yudhistira, executive director of the Jakarta-based Centre of Economic and Law Studies, suggested that rupiah depreciation showed the market distrusted Prabowo’s economic plans and leadership.
Sovereign fund Danantara Indonesia introduced its top executives, including investor Chapman Taylor, billionaire Ray Dalio, and former Thai prime minister Thaksin Shinawatra, as its board of advisers.
They stated that political stability can be seen in huge protests over the passed parliamentary amendment of the military law.
He added that mass layoffs in the manufacturing sector and declining purchase power could be another reason for the decline in money value.
Bhima stated there were signs of pressure on people’s purchasing power, like a 21% decrease in consumer goods imports in January – February.
Bhima warned that rupiah depreciation could be due to goods prices increasing as businesses pay more to import raw materials. Mass layoffs occur if the companies cannot pay for their foreign debt and expensive raw materials.
He predicts that pressure could increase on the rupiah one or two months after Eid, making it even fall to more than 17000-17,500 against the US dollar.
Pardede of Bank Permata predicts the central bank will prioritize stabilizing the rupiah exchange rate using money market intervention measures. He anticipates that the rupiah will fluctuate between 16,550 and 15,650 against the US dollar.
He stated that Indonesia’s present economic conditions are much better than the previous financial crisis. That includes foreign exchange reserves of US$156.1 billion, sufficient to cover more than six months of imports and foreign debt payments, a substantial increase from US$17.4 billion in 1998 and US$50.2 billion in 2008.
Even with political pressure and uncertainty from tariffs, Indonesia is in a much better place and position to handle global pressures, with a strong economic foundation and well-maintained policies.