A reappraisal of the rupiah is overdue


Vijay Vikram Kannan, Asia Macro Strategist, shares his views with the Business Times on the Indonesian rupiah. The resilience of Indonesia’s currency reflects the country’s revitalised economic prospects and reduced exposure to global risks. Investors can approach the rupiah with renewed confidence.

For decades, Indonesia’s currency has been vulnerable to shifts in global capital flows. The pain of the 1997 Asian financial crisis, with its ill-fated “I love rupiah” campaigns, lives long in the region’s collective memory. 

With higher yields relative to most developed markets, the rupiah attracts global traders who are quick to sell whenever US dollar interest rates increase. This vulnerability, however, is easing as Indonesia’s economy improves. 

Since the US began raising interest rates just over a year ago, the rupiah has suffered less than most of its emerging market peers. It has been notably more resilient than the Indian rupee, which is down about 10% against the greenback over the past 12 months. 

The rupiah has gained more than 4% against the dollar this year. It is Asia’s best-performing major currency of 2023. 

This relative resilience is no accident. With an improved trade surplus, young and dynamic population, and ample access to future-facing commodities, Indonesia has emerged as a standout among Asia’s emerging markets.

We believe this strength can continue. Indonesia’s currency has weathered the storm of rising US interest rates and is now benefiting from the country’s much-improved fundamentals. The bouts of volatility that defined the rupiah in the past need no longer be a deterrent for long-term investors. 

A fundamental change

The rupiah’s recent performance shows how far Indonesia’s economy has come.  

After years of deficits, the country finished 2022 with a current account surplus of USD13bn or 1% of GDP – the highest since 2010. The balance of payments for 2022 was also positive, showing a surplus of USD4bn. 

The IMF in March upgraded its 2023 GDP forecast for Indonesia to 5% from 4.8%, citing a strong performance in the current account balance and increased investment inflows.1 

This underlying performance has given Indonesia a cushion against rising US dollar interest rates. 

After 10 successive US rate hikes in 14 months, the advantage of holding rupiah assets has shrivelled: Indonesia’s policy rate of 5.75% is barely higher than the US Federal Reserve’s target range of 5-5.25%. 

A 10-year Indonesian rupiah government bond currently yields about 2.84% more than a 10-year US Treasury bond. A year ago, the difference was almost 4.5%. 

Despite this waning carry trade appeal, foreign ownership of rupiah government bonds has held steady since late 2022, even though the US dollar has continued its rising-rate trajectory. Non-residents held 14.8% of Indonesian government bonds as of April 11, the latest available data, up slightly from a low of 13.9% at the end of October. 2

That proportion also leaves Indonesia less vulnerable to sudden portfolio outflows than it has been for years. As recently as the start of 2020, some 38.6% of all Indonesian government bonds were in foreign hands. 

Long-term appeal

Indonesia’s economy has much to offer. Its rich commodity resources have served it well during the energy crisis and will continue to do so in the long term. 

Government investment in the energy transition is also a positive, and we can expect the USD20 billion Just Energy Transition Partnership (JETP) to catalyse additional inflows into low-carbon energy and early coal retirement. 

Indonesia is the world’s biggest nickel producer, and it has set its sights on a lucrative spot in the global battery supply chain. Recent equity listings in Jakarta for Harita Nickel and Merdeka Battery Materials highlight the sector’s investment appeal. 

Demographics are another source of support. Indonesia’s working-age population is still growing, in contrast to other Asian markets – notably China. Digitalisation is a major driver for Indonesia, with its population spread across thousands of islands. 

In the near term, China’s reopening is positive for the rupiah, even if advanced economies slip into a recession. China is Indonesia’s biggest trading partner, with total trade volumes in 2022 reaching close to US$150 billion. More than a quarter of Indonesia’s exports go to China, excluding oil and gas, and tourism is back: more than 50,000 Chinese tourists arrived in Indonesia in March alone.3  

Predicting the direction of foreign exchange rates is a dangerous game, but we are confident that Indonesia has turned a corner and is no longer as susceptible to the shocks that characterised rupiah trading in the past. 

Over a longer horizon, a more stable currency will also support increased long-term foreign direct investment. 

Indonesia isn’t immune to sudden shifts in global capital flows, but there are many reasons why we think the rupiah has shrugged off its historical weaknesses. Investors, too, can put their misgivings behind them. 


This article was originally published by the Business Times.


1. https://www.imf.org/en/News/Articles/2023/03/21/pr2387-indonesia-imf-staff-completes-2023-article-iv-mission-to-indonesia 
2. https://www.djppr.kemenkeu.go.id/en/tradeabledomesticgovernmentsecuritiesownership 
3. https://www.bps.go.id/ 

Vijay Vikram Asia Macro Strategist Societe Generale