Rupiah Hits Record Low Against Dollar Amid Energy Costs and Trade Woes
Quick Look
- Indonesia's rupiah has fallen to a record low against the US dollar, surpassing 18,000, driven by surging energy costs from the US-Israel war and proposed US import duties.
- A narrowing trade surplus and high dollar demand exacerbate the situation, despite central bank interventions.
AI-generated summary
Why It Matters
Indonesia's rupiah has reached its weakest point against the US dollar, breaching the 18,000 mark. This decline is attributed to increased energy costs stemming from the US-Israel conflict with Iran, which significantly strains energy-importing Southeast Asian economies. Additionally, proposed US import duties on goods from several economies, including Indonesia, over alleged forced labor failures, add to regional uncertainty.
Indonesia’s rupiah has hit its weakest level ever against the US dollar, breaching the psychological 18,000 threshold amid surging energy costs.
The currency hit 18,028 against the greenback on Thursday, despite recent central bank efforts to provide support.
The energy shock driven by the US-Israel war on Iran has placed a significant strain on energy-importing Southeast Asian economies, particularly Indonesia and the Philippines.
The resulting pressure on trade balances has contributed to capital outflows and weaker currencies.
Gulf hostilities flared again on Wednesday, sending oil prices up more than 1 percent.
Adding to regional uncertainty, the United States has proposed additional import duties of 10 percent or 12.5 percent on goods from 60 economies, including Indonesia, Malaysia and Singapore, over alleged forced labour failures.
Permata Bank chief economist Josua Pardede said that an exchange rate of 18,000 was a “psychological threshold” for market investors.
The weakening, he told the AFP news agency, was fuelled by high dollar demand caused by the spike in oil prices and a narrowing trade surplus.
Indonesia is a net oil importer and is particularly affected by the rising crude costs, though the government insists it will leave subsidised fuel prices unchanged.
The country’s trade surplus has been hammered, narrowing to just $89m in April, from $3.3bn a month before, further reducing dollar supply in the Indonesian market, Josua said.
“Dollar supply from goods trade is dwindling, while dollar needs for energy imports, raw materials, dividends, foreign debt payments and seasonality needs remain significant,” he said.
“This is why the increase in the BI [Bank Indonesia] lending rate and intervention is not enough to reverse the rupiah’s [depreciation].”
The central bank hiked rates by 0.5 basis points to 5.25 percent last month – the first increase in two years – as it looked to stabilise the rupiah and keep inflation in check.
The central bank’s spokesman, Ramdan Denny Prakoso, said on Wednesday that it continued to use “all available policy instruments” to “maintain adequate foreign exchange liquidity”.
Bank Indonesia also tightened rules for dollar purchases.
Since May, buyers of more than $25,000 in a given month have been required to provide supporting documents to justify their need for US currency.
What to Watch
AI outlook — possibilities, not facts
Further depreciation of the Indonesian rupiah if energy prices remain high and trade surplus continues to narrow.
Likely · Short term
Increased pressure on the Indonesian government to reconsider fuel subsidies if import costs become unsustainable.
Possible · Medium term
Potential for retaliatory trade measures or diplomatic responses from Indonesia and other affected countries regarding US import duties.
Possible · Medium term
Open Questions
- Will the central bank's interventions be sufficient to stabilize the rupiah in the medium to long term?
- What will be the precise impact of the proposed US import duties on Indonesia's trade balance and economy?
- How will the ongoing energy cost surge affect other Southeast Asian economies?
- Will Indonesia maintain its subsidized fuel prices despite the rising import costs?
