Dadan Wijaksana, Jakarta – While at first it was attributed mainly to a run-of-the-mill supply and demand imbalance, the rupiah's continued slump has now been blamed on another factor that is much tougher to handle – eroding market confidence.
The breaching of the psychologically sensitive threshold of 10,000 this week indeed has dealt the latest blow to the already weak market perception toward the domestic fiscal authorities, over whether they can weather the storm of negative sentiment that is pounding the rupiah, thereby stemming its dive against the US dollar.
After living dangerously last week – when the local currency twice pipped the 10,000 level temporarily during midday trading before retreating after suspected heavy intervention from the central bank – the rupiah on Monday failed to hold its ground and closed at 10,030, the weakest since March 2002.
Having witnessed the rupiah's plunge go largely unchallenged in the past several months, and coupled with little, if any, positive factors for the currency, it is hard to see it strengthening in the near future – which will keep a market confidence revival further at bay.
Over the course of the year, it has lost more than 8 percent of its value. Fears are already looming that the rupiah, now well over the 10,000 level, could snowball even further, edging farther and farther away from a desired level of about 9,000.
The dollar's renewed strength against other major currencies recently, particularly on the back of the continuing hikes of the key US interest rates, has also been blamed for the rupiah's fall on the external front.
The bigger problem however, lies on the domestic front, namely the constant high demand for dollars – both for imports and dollar-dominated debt payment needs.
This already frail condition for the rupiah has been severely worsened by the stubborn crude oil prices in the global markets, dangling currently at record-breaking levels of above US$60 a barrel – at a time when a lack of investment in the sector has now made the country a net oil importer.
The government, through state and oil firm PT Pertamina, needs a large sum of dollars to import petroleum products, both crude and refined, to meet the rapidly growing domestic fuel consumption demand. Roughly, about $1 billion per month is needed to be spent to secure fuel supplies domestically.
The situation is equally disheartening on the supply side, where the absence of capital inflows from the government's privatization program has further deteriorated the prevailing dollar imbalance in terms of supply and demand.
Economic fundamentals and policies too, should share a fair amount of the blame. Take the country's current account for example, it has reached a deficit in the second quarter faster than the central bank's expectations, as the country's imports have risen by some 30 percent as compared to export increases of 14 percent.
The market is also far from impressed by the government's newly proposed 2006 state budget, which contains assumptions deemed entirely unrealistic, most notably those of the rupiah and the oil price, which have been forecast at Rp 9,400 and $40 a barrel, respectively.
On the part of the central bank, its relatively slow moves to adjust domestic interest rates in parallel to US interest rates has made the rupiah even less attractive vis-a-vis the dollar.
Against this backdrop, the rupiah seems to have fallen victim to all the negative factors directed against it, which in the end, helps provide bargain-hunters room to speculate against the local currency, pushing it to the edge of a further plunge.
Not that there have not been efforts put in place to try to prop up the rupiah; indeed the central bank has set out a number of measures, mostly to curb speculators.
In July, it tightened rules on foreign exchange transactions, to make sure that they would be conducted with genuine underlying need.
It also sets the maximum foreign exchange derivative transaction against the rupiah, which has been reduced from $3 million to $1 million per day, while swaps are also limited to $1 million.
Still, the rupiah slide is showing little signs of abating, even as the central bank has reportedly been active in the market, using its intervention tools to help keep the rupiah in check.
Apart from continuing to selectively utilize its market intervention tools, the central bank should also work harder to provide more space for a further hike in benchmark interest rates, but at calculated paces, so as not to push the lending rates drastically up and put a brake on business activities.
For the government, tougher measures should be put in place for exporters who opt to stash their proceeds in offshore banks, which could instead make available more dollars for the domestic market.
Minister of Finance Jusuf Anwar said of the rupiah's recent slide; "Don't worry.. be happy..." – in an apparent move to comfort to the market.
Well, not too many people will be happy if the rupiah continues to dive in such a precipitous manner.