Rupiah Intervention Shows EM’s Strong-Dollar Headache

(Bloomberg Opinion) — Brazil isn’t the only big emerging market struggling with the dollar’s relentless strength. Indonesia, so often depicted as a rising star and gifted with an abundance of natural resources that the global economy desires, is busy propping up its currency. Officials have described their interventions as particularly bold. They need to be: Few things are as totemic in the vast archipelago as the standing of the rupiah. 

It has lost about 6% against the greenback this quarter and recently weakened beyond the psychologically important 16,000 level. Aside from being a big, round number, the slide resonates for a couple of reasons. The collapse of the currency during the Asian financial crisis of the late 1990s ushered in more than a deep recession — it was midwife to sectarian strife and a re-ordering of the state. The new president, Prabowo Subianto, a former top army commander, has just taken office with plans to turbocharge the economy.

Indonesia’s contemporary performance has generally been praised by the International Monetary Fund and the World Bank. The nation is often depicted as a comer — thanks to a huge population and vast mineral wealth — a nation that will share the limelight in coming years with India, China and the US. But Prabowo has expressed dissatisfaction and, during his campaign, targeted an annual rate of growth in the vicinity of 8%. He wants the government to play a bigger role in driving the economy and has made skeptical comments about laws that curtail deficits. More spending would tend to weaken the rupiah, hardly desirable right now. The rules are there for good reason.    

History explains the high degree of sensitivity to fluctuations. A former finance minister once likened watching a drop in the rupiah to a national trauma. Prabowo is now challenged in a manner a military career didn’t prepare him for. The ultimate check on power is what the market will bear. When EMs shine, Indonesia does well. When they are on the nose, as they are today, assessments are less hagiographic.  

As rough a patch as this is, Jakarta can take some comfort from being part of the pack. The dollar’s advance has many central banks on the defensive. Brazil’s travails have grabbed most of the headlines, but the retreat has been broad. The real is down 12% over the past three months and more than 20% this year. The yen is taking a beating and the Malaysian ringgit’s bumper third quarter has given way to a slide. The South Korean won has taken a drubbing since the president briefly declared martial law, a grave mistake that backfired and led to his impeachment. 

Bank Indonesia’s intervention has prevented a steeper decline. Also significant is what hasn’t happened. The central bank passed on an interest-rate cut this month that would have been justified by contained inflation — were that the only consideration. With the rupiah under pressure, there was little choice other than to demur. The bank will also buy government bonds in the secondary market.     

Indonesia is in a much sounder economic position than its South American counterpart. Inflation is under control, while Brazil is braced for price advances next year that exceed the central bank’s target. Thanks to rules enacted by Jakarta after the 1990s collapse, fiscal deficits are limited to 3% of gross domestic product. Brazil’s shortfall is approaching 10% of GDP. Prabowo has occasionally chafed at budget constraints and desires an economy that would grow faster than any other, up from the respectable average of around 5% recorded under his predecessor. If a quarter-point rate cut is on pause, tossing out these strictures should be off the agenda. (A probe of the central bank by the anti-corruption agency may also be weighing on sentiment. Bank Indonesia’s governor has vowed to cooperate.)  

They do share a common problem, though: The muscular greenback. Donald Trump’s election in November, has most currencies on the defensive. The difficulty is acute for emerging markets, which enjoyed much demand in the late 20th century and the early years of the current one. The coming era was said to belong to them; it was easy to dismiss the West as yesterday’s hero. 

EMs are, however, no longer so in vogue. A big part of the diminished allure has been China’s disappointing economic run after the rapid expansion of the 1980s that lifted living standards dramatically. To a large extent, the appeal of developing countries in their heyday was a bet on China’s march to commercial and financial supremacy. That assumption is now questionable, to say the least. A closely watched JPMorgan Chase & Co. currency index is heading for a seventh successive year of losses. 

In the weeks leading up to his inauguration in October, Prabowo looked like he was going to be the beneficiary of a favorable environment. Inflation was coming down around the world and rate cuts by major central banks would make it easier for local authorities to juice growth. Bank Indonesia began what was considered likely to be a series of reductions in September — hours before the Federal Reserve undertook its first trim since the early days of the pandemic. Luck may still shine upon the new president. Prabowo already made a shrewd call in retaining the highly respected finance minister, Sri Mulyani Indrawati, who has served since 2016.  

Prabowo has big plans. He’s finding out early, though, that power can come in many shapes and forms. Not least of which is that flickering screen on the trading floor.    

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was executive editor for economics at Bloomberg News.

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