The Weakening of Rupiah and Its Impacts Towards Indonesian Economic Condition

...

In addition to that, the current hot news, rising prices of fuel oil (BBM) is one of the affecting factor. If fuel prices go up automatically inflation rises and negative interest rates occur which led many investors lose their money. What does inflation actually means? The first insight about inflation is that it is more about the value of money than about the value of goods. Inflation is an economy-wide phenomenon that concerns, first and foremost, the value of the economy’s medium of exchange. A rise in the price level means a lower value of money because each dollar in your wallet now buys a smaller quantity of goods and services (having lower purchasing power). This has an impact also on the decline of Indonesia Composite Stock Price Index (CSPI).

[pic 3]

Picture 2.1 Graph of JCI August 2014-January 2015

The last but not least, the tension of Indonesian Political Condition also counts. Indonesia has just elected its new legislative board, President and Vice President some couple of months ago. During this period, the tension of this country’s political condition is getting warmer. All economic entities are wondering and predicting Indonesia’s future economic condition. Assumptions and suppositions take place and contribute in shaking Rupiahs value.

Those conditions definitely bring several impacts towards Indonesian economic condition which is in its process to recover. The first one is rising prices of imported commodities in Indonesia. Since the price of imported commodity currencies pegged to the foreign exchange rate, then if the value of the domestic’s currency falls, the price of imported commodities will rise.

Indonesia, which often called as an agricultural country, is still unable to meet its domestic food needs. This could be due to the weather barriers so that there is a shortage on some products. The weather barriers, such as flood caused delayed harvest and distribution. The impact to this for example, if in Indonesia, the rupiah fell by 10% from 1 US Dollar, then the price of commodity imports will rise by 10%. For example is the corn whose price rose to reach a price of USD $7,20 per bushel. This is a really apprehensive thing and forced the government to supply more corn to suppress its price.

Besides imported goods, the prices of domestically produced consumer goods also experience the impact. For the price of consumption, the price will go up not only for imports of consumer goods, but also consumer goods produced in the country, but (mostly) its effect to the production is mainly because the raw material imported. Price of tofu for example, increasing up to 20-25%, since the raw material in the form of imported soybeans. This causes a decline in the purchasing ability of Indonesian society.

The next sector impacted is the number of employment. This issue might cause increased levels of unemployment in Indonesia. If the purchasing power decreases and the price of goods and services increase which also mean that the price of raw materials increase, it's likely the company will cut the number of production (output) which can have an impact on labors layoffs. If this happens then the urban and rural unemployed labors will increase.

Even though short-run trade-off between inflation and unemployment exists, it doesn’t mean that when inflation happens, company will definitely increase its number of labors, company must also concern about the increase in fixed cost that would occur if it add the number of its employees. Therefore, increased level of unemployment is possibly happening if inflation takes place.

In addition to that, Indonesia's foreign debt suffers one of the greatest impact of the weakening of the exchange rate for foreign debt pegged to foreign currencies. If in Indonesia, we assume that the rupiah exchange rate versus the US Dollar fell by 30%, the nominal amount of the debt is pegged to the US $ will rise by 30%.

Data shows that Foreign Debt of Indonesia in November 2014 grew 11.8%, higher than the growth in October 2014 which was 10.9%. With this growth, Indonesia’s external debt position at the end of November 2014 stood at USD 294,4 billion, consisting of public sector external debt amounted USD 133,9 billion (45.5% of total external debt) and the private sector external debt USD160,5 billion (54.5% of total external debt).

We might wonder, who will bear this increase in the nominal amount of Indonesia's foreign debt? First, sufferers for private debt are the employers and employees. Second, sufferers for the government debt are the state budget (APBN) and society in general. Foreign debt payments are likely to increase a currency’s offer amount, because the amount of money owned by the debtor must be exchanged for the currency of payment of debt. As a result, the rupiah could be even more fizzle.

Seeing the condition of the current amount that continues to decline, it might ensue in reducing in public trusty towards Rupiah. Some people flocked to buy the dollar which resulted in the increase in demand on the USA dollars and it weakens the value of the rupiah. This can lead to a repetition of the economic crisis in 1998, at which time the rupiah plunged so drastically from the previous level of Rp 2,300 per US dollar (mid-1997) to the worst level of Rp17,000 per US dollar (January 1998). If Rupiah keep weakening, it stimulates the declining in the number of saving in Rupiah because people prefer have saving/deposit in Dollar.

Furthermore, the increase in the number of poverty also considered as an impact of this issue. Poverty results as the impact of the financial crisis. The increase in number of poor people is inseparable from the fall of sharp currency value, which causes the gap between reduced income due to layoffs with sharply increase in the number of spending due to the high inflation rate.

The next impact is the increase in interest rate. This effect may sound good, because it can help to press the number of inflation so that the deficit in trade balance can be reduced, and stimulates investor to keep investing in Rupiah. However, it effects in retarding the credit growth. This credit deceleration is certainly disturbing expansion plans because small investors are aware to the possibility of their insolvency.

Towards those problems occurred, actually, what are the solutions that could be taken to help overcoming and preventing Rupiah from keep declining? The following are several solutions that might overcome this problem. First, is, prioritizing exports and minimizing imports. Indonesia has a considerable amount of natural resources which, if that can be processed properly, should