February 14, 2024
JAKARTA – The rupiah has strengthened since the beginning of February and hit a monthly high on the eve of the presidential election.
Indonesia’s currency changed hands at Rp 15,803 per dollar on the last day of January, as per the daily fixing of Bank Indonesia (BI), and has been on a broadly rising trend since.
With a BI reference rate of Rp 15,585 on Tuesday, it hit the highest value so far this month just before the election.
BCA chief economist David Sumual told The Jakarta Post on Tuesday that even ahead of the election, the rupiah was mainly driven by “external factors”, which suggests there is no overriding concern in financial markets stemming from domestic developments.
He noted that Indonesia’s general election coincided with the release of macroeconomic data on employment and inflation in the United States and added that those were the main two indicators watched by the US central bank for guidance on setting the federal funds rate (FFR).
A lower FFR would reduce yields on US dollar-denominated assets and thereby generally encourage investors to shift more of their money out of the US to more risky but potentially more profitable investments abroad, for instance to emerging markets such as Indonesia, buoying the exchange rates of currencies like the rupiah in the process.
The Federal Reserve (Fed) lifted the FFR to a high point of 5.25 to 5.5 percent in July last year and has kept it there ever since, but it has signaled at rate cuts to take place in 2024, which could happen if employment and inflation figures are low.
US employment data for January published last week pointed to an unexpectedly hot labor market, which would typically increase inflationary pressure and reduce the odds of a Fed interest rate cut. However, subsequent comments by Fed officials signaled that the US central bank nevertheless sees “moderation” in employment and wage growth, suggesting that the latest data will not get in the way of interest rate cuts.
Meanwhile, markets were expecting inflation data to be announced on Tuesday to further support the prospect of an interest rate cut by the Fed.
These external factors played a much bigger role in the rupiah’s movement than the election, David said, adding that that had been the case also in the past four presidential elections.
“That’s a good thing. As long as there’s no dominant domestic issue, be it in politics or the economy, external factors will impact the [rupiah exchange rate] more,” said David, explaining that this implied Indonesia was deemed relatively safe by market actors.
If an election affected a country’s foreign exchange rate, that meant the country had a currency volatility problem stemming from political and/or economic instability, he explained, pointing to inflation-ridden Argentina as a fresh case in point.
David went on to say that the election would affect portfolio investment more than the foreign exchange market, since the former was more strongly linked to government policies.
“The past four elections lifted the stock and bond markets afterward,” said David.
Conversely, that suggested that elections in the country created uncertainty that made portfolio investors cautious and prompted them to wait until after polling day before placing any wager.
The Capital Sensitivity Analysis (CSA) index, published by the CSA Institute earlier this month, showed a drastic drop in confidence, suggesting that “market participants were less enthusiastic about trading”.
The survey cited “quite a high” degree of uncertainty regarding the election and a weakening rupiah exchange rate as reasons for the index’s drop in January. The institute wrote further that the uncertainty would persist should the election require a runoff.
Some 200 million Indonesians are to cast ballots on Wednesday, and if no candidate garners a 50 percent-plus-one vote majority and gets at least 20 percent of the vote in 19 out of 38 provinces, a second round is scheduled to take place in June.
Similarly to BCA’s David, the chief economist of state-owned lender Bank Mandiri, Andry “Asmo” Asmoro, told the Post on Monday that the rupiah movement was mainly directed by “global sentiment rather than domestic factors, including the election”.