Yuan Devaluation Kicks Rupiah When It's Down

By Jake Maxwell Watts 

        Indonesia's already-foundering rupiah slumped to a fresh 17-year low against the U.S. dollar this week after China devalued the yuan, exacerbating problems for Jakarta policy makers.
        The rupiah's 9.7% fall this year--among Asian currencies, only Malaysia's ringgit has performed worse--has dragged it to its lowest level since the 1997-98 Asian financial crisis. One dollar bought 13,710 rupiah as of Thursday morning in Asia, 1.4% more than at Monday's close.
        For the rupiah, already depressed by falling exports and economic growth at a five-year low, a weaker yuan hurts two ways, by making Chinese exports more competitive and by pushing up the price Chinese buyers must pay for Indonesian goods such as coal and palm oil.
        Investors are also concerned about the effect on the rupiah of a U.S. interest-rate increase expected later this year. Rising U.S. interest rates would push up the value of the dollar, raising the cost of servicing Indonesia's U.S.-dollar debt.
        "Can it go higher, dollar against rupiah? It probably can. I see a lot of uncertainties in terms of where the dollar is heading in the summer," said Christy Tan, head of markets strategy and research at National Australia Bank. "I think [Indonesian policy makers] should be more worried than they are currently expressing."
        Plummeting confidence in Indonesia's economy is another factor in the rupiah's weakness. It gives Indonesian exporters, for example, an incentive to hold on to foreign-earned dollars and a disincentive to trade in rupiah as the U.S. dollar appreciates.
        Bank Indonesia and the government have tried hard to lift the rupiah. Last month the government said it would raise import tariffs on more than 1,000 items including clothes, food and cars, to encourage Indonesians to buy local goods in rupiah and spend less on imports, while BI banned the use of foreign currencies in domestic transactions. Economists suspect the central bank has intervened repeatedly in currency markets, selling dollars and buying rupiah. One thing it hasn't done is raise interest rates, which could support the rupiah but also further constrain growth.
        But the rupiah continues to fall.
        Analysts say that the decline is inevitable, caused by market forces beyond policy makers' control--but they add that poor execution of rupiah-supporting policies hasn't helped.
        Requiring that domestic transactions take place in rupiah, for example, should increase demand for the currency and encourage companies to convert their foreign earnings. In practice, though, the policy "created another issue, which is that it passes the buck of hedging to the local companies," said National Australia Bank's Ms. Tan. If a hotel, for example, can no longer accept payments in U.S. dollars but must continue to make purchases in dollars, it must look for other ways to protect itself against a falling rupiah. The policy has added other costs as well, as Indonesian companies scramble to set up new accounting mechanisms to cope with the changes.
        Nonetheless, the practice of local companies transacting with each other in U.S. dollars must stop, Bank Indonesia senior deputy governor Mirza Adityaswara told The Wall Street Journal in response to a request for comment.
        "Now, the question is, Can we immediately change the practice that has been in place for 30 to 40 years? Certainly not. It takes time," he said.
        Other policies carry their own problems. The plan to raise tariffs "has in some senses undermined foreign-investor sentiment," said Claudio Piron, co-head of Asia rates at Bank of America Merrill Lynch. And it may have only limited success in pushing consumers to buy domestic, since Indonesian producers are currently unable to fulfill local demand for many goods.
        But if policy makers have been unable to arrest the rupiah's decline, Mr. Piron added, they have at least succeeded in reducing its volatility.
        Philip Wee, senior currency economist at DBS, agrees. "If you think in terms of stopping [the rupiah's fall], then you will come to the conclusion that [central-bank policy] is not effective," he said. "If it's a managed depreciation, that is understandable, given the climate."
        I Made Sentana contributed to this article.
        Write to Jake Maxwell Watts at jake.watts@wsj.com
        (END) Dow Jones Newswires

        August 13, 2015 15:30 ET (19:30 GMT)