Indonesian Finance Chief Aims to Shield Economy From Dollar Rise (2024)

(Bloomberg) — The Indonesian government is working with central bank governor Perry Warjiyo to cushion the country’s economy from the rise in the US dollar, according to its finance minister.

“We work very closely with Governor Perry,” Finance Minister Sri Mulyani Indrawati said in a Bloomberg Television interview on the sidelines of the meetings of the International Monetary Fund and World Bank Group in Washington. The administration is focused on ensuring that fiscal policy can work as “an effective and credible shock absorber,” she said.

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The Indonesian rupiah has been one of the hardest hit currencies in Asia this month as the Federal Reserve pushes back interest rate cuts and tensions escalate in the Middle East. The currency this week dropped beyond the key level of 16,000 versus the greenback — for the first time since 2020, prompting Bank Indonesia to step up its interventions in the market to stem the fall.

The rupiah’s slump has led to increasing bets that Bank Indonesia will resume interest rate hikes when it reviews monetary policy settings on April 24. The governor, who surprised markets with a tightening in October amid the rupiah’s rout, has said that the central bank is always in the market and working closely with fiscal authority to stabilize the exchange rate. The benchmark rate is at 6% currently.

Southeast Asia’s biggest economy also told its state-owned enterprises to refrain from making large dollar purchases for its import or debt servicing requirements to avoid adding pressure on the rupiah. Natural-resource exporters were also reminded to comply with rules to repatriate dollar earnings to shore up the nation’s FX reserves.

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She said that while the strong dollar can increase the revenue from exports, it also risks adding inflationary pressures through imports.

Fiscal Outlook

Doubts over the incoming government’s fiscal policy have also been keeping the rupiah under pressure. Foreign investors have sidestepped Indonesia’s debt market on concerns that president-elect Prabowo Subianto’s free-lunch program could cost around 2% of gross domestic product.

Prabowo’s economic team has previously said that cutting back energy subsidies could help free up spending room for the program, without elaborating on the steps and timing of the policy. Without a clear financing strategy, the program could put Indonesia’s debt load at risk and threaten its investment-grade sovereign rating, which was recently affirmed by Fitch Ratings and Moody’s Ratings. The government is planning to widen next year’s budget gap to as much as 2.8% of GDP from 2.3% of GDP targeted for 2024.

Indrawati insisted Thursday that the budget deficit will remain under 3%.

Her tenure as finance minister will end in October when the current president’s second five-year term draws to a close. While discussions to shape Prabowo’s new cabinet are still at an early stage, several new names are being considered for the finance chief role.

Indrawati, a former World Bank managing director, has helmed Indonesia’s economy since 2016, following a shorter stint between 2005 and 2010. She has been credited with steering the country through the turmoil spurred by the Covid-19 pandemic, embarking on an unprecedented debt monetization with the central bank to fund stimulus spending.

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