Indonesia Aligns Policies to Tackle Rupiah’s Slide

Indonesia has affirmed its commitment to synchronising fiscal and monetary measures to shield its economy from the impact of the strengthening dollar. This concerted effort, highlighted by active intervention from the central bank, underscores a comprehensive strategy to support the rupiah.

Finance Minister Sri Mulyani Indrawati, in a Bloomberg Television interview on Thursday, emphasised the close collaboration between the government and Bank Indonesia Governor Perry Warjiyo. Their coordination aims to adjust the macroeconomic stance to counteract the mounting pressure on the rupiah.

During the International Monetary Fund and World Bank Group meetings in Washington, DC, Indrawati reiterated Indonesia’s focus on ensuring that fiscal policy functions as an effective shock absorber, capable of maintaining credibility amidst economic challenges.

Governor Warjiyo, from DC, reaffirmed Bank Indonesia’s commitment to currency stability, signalling an increased intervention in foreign exchange markets. This move comes in response to recent market volatility triggered by geopolitical tensions, which have pushed the rupiah to multi-year lows against the dollar.

The rupiah’s decline, breaching the key level of 16,000 against the dollar for the first time since 2020, prompted intensified interventions from Bank Indonesia. Pressure to raise the benchmark rate on April 24 has mounted, with analysts suggesting the possibility of a 50 basis points hike.

Barclays Plc economist Brian Tan noted the heightened government response, indicating a potential larger rate hike. Market expectations remain divided, with only a fraction predicting a hold on the benchmark rate.

Indonesia has also taken proactive steps to mitigate further pressure on the rupiah, instructing state-owned enterprises to limit large dollar purchases for imports or debt servicing. Additionally, natural-resource exporters have been urged to comply with regulations to bolster currency reserves.

Indrawati addressed concerns over the impact of the strong dollar on inflationary pressures through imports, emphasising the need for a balanced approach.

Amid doubts surrounding the incoming government’s fiscal policies, foreign investors have been cautious, particularly regarding the proposed free-lunch program. Indrawati stressed the importance of maintaining a prudent fiscal policy to safeguard Indonesia’s investment-grade sovereign rating.

Despite economic challenges, Indrawati expressed confidence in Indonesia’s ability to sustain economic growth and keep the budget deficit below 3% amidst a prolonged period of higher interest rates.

As Indonesia navigates through economic headwinds, the alignment of fiscal and monetary strategies underscores a proactive approach to ensure stability and resilience in the face of evolving global dynamics.