Since last year, the rupiah has lost 10% of its value against the dollar. This is a serious matter following the Indonesian government, despite the fact that the country is currently welcoming delegations to the World Economic Forum. President Joko Widodo has promised stronger economic growth for the country, and has implemented measures to combat the currency decline. The Indonesian government hopes that by lifting visa fees for tourists and changing tax regulations, the value of the rupiah may rise again.
Numerous store owners in the nation’s capital, Jakarta, have recently seen neighboring shops close and go out of business due to the decline in the value of currency. The technology and transport manufacturing industries have been impacted negatively, with car and motorcycle sales dropping 20% in February. Additionally, the rupiah is the worst performing currency in all of Asia this year. According to the chairman of the Indonesian Chamber of Commerce, Suryo Bambang Sulisto, “you’re hit especially hard if you’re borrowing in U.S. dollars. Some say it’s good for exporters – but not really, because a lot of exporters import their raw materials, so it hurts them too.”
In the past, many tourists from western parts of the world were required to pay a $35 fee for a visa upon their arrival in Indonesia. But under the new changes made this month, these tourists will no longer have to pay for their visas. Policymakers hope that this will attract more tourism to popular destinations such as Bali and Lombok and generate more revenue and gradually increase the value of its currency. Other countries utilizing this policy have seen great success. Malaysia, for example, does not charge its tourists for visas and sees approximately 27 million tourists a year, compared to the 9 million in Indonesia.
The instability of the rupiah makes it the most costly currency in Indonesia to hedge. Currency hedging is defined as the act of entering into a financial contract in order to protect against any unexpected, expected, or anticipated changes in exchange rates. The rupiah’s one-month onshore implied yield, which is a measure of expected interest rates and fluctuations that help companies hedge against exchange rates, rose to 13.05% on April 9. Although this was the highest level since 2010, the rate declined back to 8.76% on April 27. Since hedging is so expensive, many people believe that it is more beneficial for companies to avoid it since they can book 9% as profit compared to their peers who hedge book at a cost.
In regards to the recently implemented policies, there still seems to be no positive effect on the value of the rupiah thus far. The currency is trading at more than 12,900 rupiah to the U.S. dollar, which is nearing a decade low. Some of the factors that have led to this decline, according to Ben Bingham of the IMF, are the strength of United States currency, an unfriendly business environment, and political uncertainty. In addition to these three factors, some state-owned companies are not following a 2013 law that requires them to hedge. Less than 30% of Indonesian companies’ new foreign-currency corporate debt is hedged, and this could further exacerbate the declining value of the rupiah. While the Indonesian economy remains strong, the instability of the rupiah may cause concern for investors.