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Weaker rupiah, high oil prices hit Indonesia's manufacturing sector

Jakarta Post - April 19, 2024

Ruth Dea Juwita, Jakarta – Indonesian manufacturers are feeling the pinch, as a weakening rupiah exchange rate against the United States dollar and a surge in oil prices lead to higher input costs for local industry.

The rupiah has been on a downward trend in recent weeks due to uncertainty surrounding US monetary policy and geopolitical conflicts. The currency was priced between Rp 16,200 and Rp 16,300 per dollar since Tuesday after breaching Rp 16,000 per dollar at the start of the Idul Fitri holiday.

Meanwhile, international oil price benchmark Brent Crude reached a six-month high last week before settling down 3 percent on Wednesday to US$87.29 per barrel, Reuters reported on Thursday. Some analysts expect it could still rise to $90 per barrel.

Indonesian Textile Association (API) chairman Jemmy Kartiwa told The Jakarta Post on Thursday the plunging rupiah had put further pressure on an already struggling domestic textile industry amid tighter export markets and an influx of foreign goods.

"The textile industry is highly dependent on the volume of imports," Jemmy explained.

Indonesian Food and Beverage Producers Association (Gapmmi) chairman Adhi S. Lukman said on Thursday that both the exchange rate and oil prices had led to rising energy and logistics costs, which were then reflected in increased production costs.

Pressure also come from raw materials, as the industry sources most of its inputs from overseas, he explained.

"Some commodities have already seen price increases, like plastic pellets for food and beverage packaging," Adhi pointed out, "while prices of raw materials that had already increased include grains, meat and milk."

"We are waiting for government intervention in the rupiah exchange rate and government efforts to reduce certain costs as compensation for the [increase in] production costs that have occurred," Adhi emphasized.

Shinta Kamdani, chairwoman of the Indonesian Employers Association (Apindo), warned that a prolonged weakening of the rupiah could force manufacturers to cut production volume as overhead costs rise.

With 70 percent of total imports being raw and auxiliary materials and 10 percent being capital goods, manufacturing industry is particularly vulnerable to imports, she said on Thursday.

"If the rupiah continues to weaken for more than a month, it will drive up selling prices in the market which could potentially trigger higher inflation, slower sales and reduced consumer spending growth, and even exceed the national inflation target if the government is unable to stabilize the exchange rate," Shinta emphasized.

The government is currently mapping out solutions to protect the industrial sector from escalating energy prices and the rupiah depreciation amid the ongoing conflict in the Middle East.

The Industry Ministry has proposed incentives for raw material imports originating from the Middle East to mitigate supply disruptions for domestic industries, such as naphtha, which relies on supply from the oil-producing region.

Industry Minister Agus Gumiwang Kartasasmita also suggested in a statement on Thursday some import relaxations to ease procurement of raw materials.

In a bid to reduce reliance on hard currencies especially the US dollar, the government will also propose an increase in the use of local currencies for bilateral transactions carried out by business actors in Indonesia and partner countries especially within Asia.

This initiative was intended to stabilize the rupiah exchange rate and enhance economic stability, he explained, citing greater trade potential between Asian countries.

BCA chief economist David Sumual told the Post on Thursday that both the weaker rupiah and high oil prices were currently in "correction" phase amid an easing Middle East conflict. He projects Indonesia could still maintain inflation well within Bank Indonesia's target, for now.

David said increasing the use of local currencies with Indonesia's trade partners would remain challenging, as businesses are still accustomed to conducting transactions in US dollars.

"It will take time and thorough familiarization because the habit of using a specific currency is difficult to change," David explained.

Meanwhile, Ali Setiawan, head of markets and securities services at private lender HSBC Indonesia said in a statement on Thursday that the rupiah may get a breather after July, following the end of the seasonal dividend outflow season that starts in April. This also assumes geopolitical risks are manageable and the US Federal Reserve maintains its expected rate cut cycle.

The rupiah may gain more support later this year if the US Treasury yields decline as the bank expected, and investors could get more clarity on the incoming government.

Source: https://asianews.network/weaker-rupiah-high-oil-prices-hit-indonesias-manufacturing-sector