Indonesia’s Central Bank Takes Action to Stabilize Rupiah
Indonesia’s central bank has made significant interventions in the foreign exchange markets as the rupiah approaches five-year lows, driven by concerns surrounding the country’s sluggish economic performance and President Prabowo Subianto’s costly financial initiatives.
Market Response and Economic Context
This intervention follows a notable drop in Jakarta’s main stock index, which fell by 7.1 percent, reaching its lowest levels since 2021. Although the market experienced a slight recovery on Wednesday with a 1 percent uptick, the rupiah itself saw a decline of up to 0.7 percent against the US dollar during the same period.
Central Bank’s Measures and Economic Sentiment
Edi Susianto, the executive director of the central bank’s monetary department, emphasized that the bank’s actions aim to stabilize the rupiah due to its correlation with the recent downturn in the stock market. “We are boldly in the market to ensure the balance of FX supply and demand in order to maintain market confidence,” he stated in an interview with the Financial Times.
Concerns Regarding Economic Growth
Investor sentiment remains shaky amid growing fears about Indonesia’s economic outlook. Recent reports highlight a decline in purchasing power and consumer confidence, issues that economists link to a shrinking middle class and a deteriorating manufacturing sector, compounded by a global economic slowdown.
The central bank’s interest rate decision is anticipated later today, with economists surveyed by Reuters and Bloomberg predicting a likely hold on interest rates. However, some analysts suggest a potential rate cut could be on the horizon, aimed at stimulating economic growth.
“Bank Indonesia is caught between a rock and a hard place,” said Lavanya Venkateswaran, a senior Asean economist at OCBC. “We lean towards a rate cut, as signs of weakening growth momentum have become increasingly evident in recent weeks. We believe it would be prudent for BI to prioritize growth at this juncture.”
Additional Regulatory Measures
In a bid to restore market confidence, Indonesia’s securities regulator has authorized companies to repurchase their own shares without needing shareholder approval for an initial six-month period.
Political and Fiscal Challenges
Market apprehensions have been exacerbated by President Prabowo’s ambitious spending plans, which include a nationwide free meal program for schoolchildren and pregnant women, projected to cost an estimated $28 billion annually, thus straining the national budget.
Simultaneously, efforts to boost governmental revenue have been ineffective, with data indicating a 20 percent drop in state revenue during the first two months of the year compared to the previous year.
Further complicating the situation is the speculation regarding the potential resignation of Finance Minister Sri Mulyani Indrawati, which she has publicly denied. Concerns surrounding potential political interference and a lack of transparency in the newly established sovereign wealth fund, Danantara, which oversees assets of several major state-owned enterprises, also loom large for investors.
