0 Subsidies, Trade Deficit Weigh on Rupiah

The rupiah may further weaken against the US dollar this year if the government fails to come up with a firm and clear plan to curb subsidized fuel consumption — one of the main causes of Indonesia’s deteriorating external trade balance. The rupiah slid 0.1 percent to 9,670 against the dollar on Monday, according to indicative price data from Bank Indonesia, the central bank. The currency has flirted with the 10,000 mark since last week, a level not seen since 2009. 

Finance Minister Agus Martowardojo told the House of Representatives on Monday that he expected the currency to trade this year at around 9,300 to 9,700 against the dollar due to pressure from a widening current account deficit and global economic uncertainties. The government assumes Rp 9,300 against the dollar in its exchange rate calculations for the state budget. Central bank Governor Darmin Nasution said curbing subsidized fuel use was key to improving the current account deficit and strengthening the rupiah. 

“The high level of fuel consumption is a central problem that needs to be addressed,” Darmin said during the same public hearing at the House on Monday. Still, the central bank has pledged to do what it can to ensure the rupiah’s stability. “Bank Indonesia will always be ready to intervene if the rupiah depreciates excessively from its fundamental [level],” Darmin said, but added that the central bank’s room to defend the currency was diminishing. The government estimates that this year’s subsidized fuel consumption could reach 48 million kiloliters, up from an estimate of 46 million kiloliters made earlier in the state budget. 

Between fuel and electricity subsidies, the handouts’ Rp 275 trillion ($28.5 billion) price tag accounts for almost one-fifth of the state budget. Agus noted that there was a risk of capital outflows from the country as investors potentially grow anxious over the country’s trade imbalance, despite central banks in developed countries maintaining relaxed monetary stances. “The sluggish economy in Europe and uncertainty regarding a solid solution on the US fiscal cliff will still shadow global economic recovery this year,” Agus said. 

The current account deficit, measuring the balance of goods and services trade, income transfers and remittances, stood at $5.4 billion, or 2.4 percent of gross domestic product, in the third quarter of last year, narrowing from a record deficit of $6.9 billion in the second quarter. The imbalance is linked to the country’s commodities-dominated exports, which have slumped due to falling global demand. At the same time, imports have been increasing on the back of fuel imports — encouraged by the subsidy — and capital goods purchases. The Finance Ministry’s fiscal policy office had expected the 2012 full-year deficit to hit 2.4 percent of GDP.

source : the jakarta globe