The rupiah breached another psychological threshold again as it fell to more than Rp 12,000 per US dollar for the first time in four years, further hurting the country's manufacturing industry, which mostly imports raw material for its production needs.
Indonesian Employers Association (Apindo) chairman Sofjan Wanandi said manufacturing firms, including those in food and beverages, textiles and footwear production, would feel the worst impact of the situation as import content was commonly high in their output, he said.
"They will be severely hurt because the cost of raw material purchases will surge while at same time it will be very difficult for them to raise their prices due to tight competition in such an economic slowdown," Sofjan told The Jakarta Post.
Sofjan said it would be necessary for Bank of Indonesia to soon intervene by boosting its dollar reserves to calm the market. In addition to this, a long-term solution should be taken through executing a few measures earlier issued in anticipation of the current slowdown.
The rupiah fell 1.1 percent to hit Rp 12,015 per dollar as of 4.25 p.m. in Jakarta, the weakest level since March 2009, according to prices from local banks compiled by Bloomberg. The currency depreciated 2.7 percent this week, its worst weekly decline in November.
Financial analysts said that the fall in the rupiah was mainly caused by surging demand for dollars, which usually peaked near the end of the year as companies increased their greenback purchases for earnings repatriation and foreign debt payments. Externally, the US Federal Reserve signaled a possible tapering of its monetary stimulus that could be decided in its next meeting on Dec. 17-18, consequently triggering capital outflows in emerging countries, including Indonesia.
"It's the end of the year when demand for dollars increases," Harry Su, the head of research with Bahana Securities, commented on the rupiah's recent weakness. "The situation is worsened by the fact that BI no longer supplies dollars for Pertamina, with the company now entering the market to buy dollars."
On Thursday, the Jakarta Composite Index (JCI) fell 0.4 percent to close at 4,233.93, the weakest level since Sept. 9. "Foreign investors will be reluctant to re-enter the market if the rupiah still has a tendency to weaken," said Harry.
With the rupiah now heading into another depreciation spiral, all eyes are now fixed on BI, the central bank, which faces the challenging task of trying to support the under-pressure currency without depleting its foreign exchange (forex) reserves too much.
The central bank has loosened intervention in the currency market, a strategy that has led to a significant increase in its forex reserves, which have strengthened for three consecutive months to top $97 billion by the end of October.
"Because volatility has now returned, it is BI's focus now to protect the rupiah until it stabilizes at a certain level," BI spokesperson Difi Johansyah said on Thursday evening. "Whether it is 11,500 or 11,800 or 12,000 [per dollar]; we just want the market mechanism to function again."
Standard Chartered economist Fauzi Ichsan said the rupiah's depreciation would hit the business sector hard.
"The fall in the rupiah will increase import costs, thereby hitting industries that import a lot of raw materials. Furthermore, a lot of companies have debts in US dollars," he told the Post on Thursday in a telephone interview.
He said the rupiah may depreciate further, reaching Rp 12,500 in the first half of next year.
Publicly listed plantation company PT Salim Ivomas Pratama, however, said it expected a windfall as the rupiah's depreciation would increase its export earnings, according to its head of treasury Johnny Ponto.
"I think our clients can still tolerate a [dollar] level of between 12,000-12,500," said Pahala N. Mansury, the finance and strategy director with state-run Bank Mandiri. "However, some of them might start feeling the pinch if it hits 13,000."
Anggi M. Lubis, Tassia Sipahutar, Ogi and Tam contributed to this story
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