The Indonesian Rupiah (IDR) has been experiencing significant declines, recently surpassing the psychological threshold of $18,000 per dollar. This downturn is attributed to a mix of geopolitical risks, a severe lack of dollar liquidity worldwide, and rising energy prices, which are particularly impacting Asian countries that rely heavily on imported oil.
On top of these external factors, there are growing domestic worries regarding the independence of Bank Indonesia (BI) following the new Growth Imperatives Bill. Leading experts from the World Bank are suggesting that the pressure on the rupiah is likely to persist in the near future.
Concerns about independence and energy shocks drive the rupiah down
Strategic analysts at Brown Brothers Harriman (BBH) note that the expansion of Bank Indonesia’s mandate to focus heavily on economic growth has unsettled investors. There are fears that priorities like controlling inflation and stabilizing the exchange rate may take a backseat. This structural change, alongside significant energy supply issues in the Middle East disrupting oil imports, leaves currencies like the IDR particularly vulnerable to further declines.
The IDR seems undervalued compared to domestic fundamentals, yet it will likely continue facing downward pressure until the energy crisis alleviates.
Capital outflows persist while risks grow
Analysts from MUFG highlight that the depreciation of the rupiah is intensifying, driven by a notable exodus of foreign investment from local stocks and rising yields on global bonds. Stress on local funding markets is reaching alarming levels, and the rupiah may weaken further against the US dollar before an eventual reversal occurs due to excessive short positions.
The liquidity situation for USD/IDR remains extremely tight, mirroring the stress observed during the early COVID-19 crisis in March 2020, suggesting continued upward risks for USD/IDR.
Short-term outlook looks bleak, but a sharp turnaround is conceivable
Financial institutions are projecting a challenging and strained future for the Indonesian rupiah, cautioning that it remains structurally weak for now. BBH emphasizes that despite the rupiah being technically undervalued against domestic factors, it will face ongoing downward pressures until the global energy situation improves. MUFG adds that while the projections indicate limited upside for the USD/IDR due to severe funding issues, an unexpected easing of geopolitical tensions or clearer policies could potentially trigger a rapid reversal in fortunes.
