Bank Indonesia expects rupiah to strengthen to 13,700 per dollar in 2021

Bank Indonesia (BI) expects the rupiah to strengthen further next year to around Rp 13,700 to Rp 14,300 per United States dollar on the back of domestic economic recovery starting in the third quarter this year.

BI Governor Perry Warjiyo said Monday the rupiah remained “fundamentally undervalued” and would strengthen further to reflect its fundamentals, citing a narrowing current account deficit as well as a low inflation level and yield spread compared to other countries.

“The rupiah will strengthen further, supported by an attractive domestic yield, which in turn will support domestic economic recovery,” Perry told lawmakers during a parliamentary hearing. “We are in a close coordination with the government not only to maintain stability but also to speed up economic recovery.”

The central bank cut its benchmark interest rate for the third time this year last week, after a two-month pause, bringing down the seven-day reverse repo rate to 4.25 percent in bid to bolster economic growth.

Indonesia’s economic growth fell to the lowest level in 19 years in the first quarter as the COVID-19 pandemic battered household spending and investment. A spike in risk-off sentiment due to the pandemic fears in March also caused the rupiah to depreciate by around 18 percent in that month alone.

BI has bought government bonds worth Rp 166.2 trillion (US$11.6 billion) from foreign investors in the secondary market to stabilize the rupiah and sealed a $60 billion deal with the US Federal Reserve to ensure a steady supply of dollar liquidity. The move is seen by economists as boosting investors’ confidence in Indonesian assets.

The currency has since managed to erase most of its losses this year and was trading at 14,149 per US dollar on Monday, a depreciation of only 2.05 percent since the start of the year.

The central bank now expects the rupiah to average between Rp 14,000 and Rp 14,600 against the greenback this year.

The government, however, expects the rupiah to average between Rp 14,900 and Rp 15,300 per dollar next year in its proposed 2021 state budget macroeconomic assumption.

“The rupiah exchange rate is slightly stronger than we previously expected [between 14,500 and 15,500 per US dollar] in April due to high volatility,” Sri Mulyani told lawmakers in the same hearing.

The government now expects the economy to shrink 0.4 percent this year under the worst-case scenario, or grow 1 percent under the baseline scenario. Meanwhile, the central bank offers a more optimistic view that the economy will grow between 0.9 to 1.9 percent.

“We believe BI is now in a position to prioritize [economic] growth but financial stability concerns will remain a deterrent for a dramatic slashing of the policy rate,” researchers at Fitch Solutions wrote in a note, highlighting the central bank’s dual mandate to maintain price stability and mitigate rupiah volatility to ensure the strength of the financial market.

“The stability in financial circumstances provides room for BI to ease monetary policy at this stage,” the researchers wrote. “However, we continue to highlight that the Indonesian central bank will err on the side of caution when undertaking monetary policy easing.”

Fitch Solutions expects the central bank to take at least one further 25 basis point cut this year to prop up the economy as it expects Southeast Asia’s biggest economy to shrink 1.3 percent this year.