Indonesia | Why the rupiah slide won’t turn into a freefall

Asian currencies have broadly struggled in recent months due to the strengthening of the US dollar on the back of favorable growth and rate differentials. These pressures are likely to persist. Indeed, we expect US President Biden’s extraordinary fiscal stimulus will support a 3% y/y trade-weighted dollar appreciation by year-end.

What you will learn from this report:

• Due to the recent strength of the US dollar and our expectation that Indonesia’s central bank will not raise rates in the near-term as inflation remains subdued, we now forecast the rupiah to weaken a further 0.8% by year-end from end-Q1.
• Indonesia’s economy is on a recovery path, while the share of foreigners holding government bonds has dropped. This will help to contain sharp movements in portfolio flows. 
• From next year, we expect a strong rebound in Indonesia’s growth will steer the rupiah back onto an appreciating trend, and we maintain our long-held optimism for the medium-term outlook for the currency.