October 18, 2024
The Importance of Rupiah's Strength

Market Commentary
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Amid the unresolved tension in the Middle East, recently global news announced that Prime Minister Benjamin Netanyahu, have provided assurances to the United States that any potential counterstrike against Iran would be confined to military objectives, excluding oil and nuclear installations. This information was disclosed by an individual with knowledge of the discussions as derived from several news sources. 

This information is relevant not only to Indonesia citizen's safety amidst the escalating war but also plays a major role in determining the country's economic outlook. The USD/IDR exchange rate once almost reached IDR 15,000 per USD, but it surged again to c. IDR 15,700 per USD when tensions between Iran and Israel escalated. We believe this was due to Indonesia's preventive action of frontloading its oil needs to avoid higher oil prices in the future, should the situation deteriorate.
 
Brent Oil Price (Blue) and USDIDR Exchange Rate (White) YTD Performance


As an oil-importing country, Indonesia's currency will weaken if oil prices surge. This is why we consider this information important, as it will impact the strength of the Indonesian rupiah, which in turn affects foreign investment traction. However, based on Indonesia's recent trade balance, the rupiah's strength is likely to increase.

In September, Indonesia recorded trade balance surplus of USD3.26bn, grew 12.8% higher from August surplus at USD2.89bn. This figure surpasses both our economist projection of USD3.00bn and the consensus estimate of USD3.10bn. This marks 53 consecutive months of trade surplus for Indonesia, strengthening the outlook for a lower current account deficit in the second half of 2024.
 
Indonesia Trade Balance


We expect Bank Indonesia to further cut its BI7DRR this year, supported by Indonesia's strong trade surplus. However, current tensions in the Middle East may have made Bank Indonesia more cautious. Bank Indonesia (BI) hold the BI-Rate at 6.00% in October, in line with consensus and our projection. Unlike the previous rate cut, which occurred before the Fed announced a 50bps rate cut, we believe Bank Indonesia will wait for the Fed's FOMC meeting result in November before deciding to lower the BI7DRR.

BI still project that the Fed will cut the rate two more times in 2024 by 25 bps each while three to four times cuts in 2025 despite recent geopolitical turmoil. This we believe will give more room for Bank Indonesia to cut its interest rate while maintaining Rupiah's strength by maintaining lucrative yield spread with the Fed Fund Rate. 
 
USDIDR Exchange Rate (White) and JCI Index YTD Performance

As seen from the chart, the correlation between Rupiah and JCI performance is very strong. Therefore we encourage investors to pay attention to Rupiah exchange rate strength as one of the indicator for JCI performance.

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