Rupiah’s Depreciation Reflects Economic Uncertainty in Indonesia

For the first time in the last four years, on April 19, 2024, the Indonesian currency, the rupiah, experienced a decline, reaching a rate of 16,200 per US dollar.

For the first time in the last four years, on April 19, 2024, the Indonesian currency, the rupiah, experienced a decline, reaching a rate of 16,200 per US dollar. Responding to the potential crisis at hand, the Central Bank of Indonesia (BI) intervened to stabilize the balance between supply and demand in the market. The institution even conducted a Board of Governors meeting on April 23 to 24, 2024 to discuss the benchmark interest rate amidst the depreciation of rupiah. This was simply not an isolated event but rather the culmination of a series of preceding political developments. It all began when Indonesia’s presidential and legislative elections kicked off, causing the country to plunge into political instability due to various controversies. Among these was the allegation that Prabowo Subianto, the newly-elected president, had a history of human rights violations, leading certain factions to question his suitability for the presidency. Through this article, the election process, tensions between political parties, and social dynamics that unfolded thereafter are argued to have exerted a notable influence on economic stability to date, including the rupiah exchange rate. This piece will also shortly analyze what the future holds for Indonesia’s rupiah under Prabowo’s regime.

Exchange rate is inherently political

While numerous factors contribute to currency exchange rate fluctuations, politics emerges as a paramount component significantly affecting the rates of a currency. Political elements such as the political parties’ stances on economic policy, electoral processes, civil unrest, and geopolitical tensions have the potential to generate market volatility. These factors introduce uncertainty and can impact investor confidence, leading to fluctuations in financial markets. According to Jefry Frieden, exchange rates and political policies are deeply interconnected.  Political decisions and actions can directly impact exchange rate movements, while exchange rate fluxes can, in turn, shape political and economic policies.

One of the key actors responsible for regulating exchange rates is the central bank. Through its monetary policy decisions, the central bank wields significant influence over both supply and demand dynamics. However, being a government institution, the central bank is unavoidably susceptible to political pressures and holds political power to a certain extent. Even simple statements issued by central banks, such as changes in interest rates or the implementation of quantitative easing measures, can trigger substantial market oscillations. Moreover, besides central banks, government officials, particularly ministers and presidents also have the power to influence exchange rates. For instance, when Sri Mulyani, the Finance Minister of Indonesia, was rumored to resign after her alleged tension over the Ministry of Defense’s budget. The ensuing uncertainty surrounding the resignation has had immediate repercussions on the nation’s financial markets, prompting substantial divestment by foreign investors. This in turn caused the depreciation of the rupiah, at the time ranging between 15,600 to 15,845 against the US dollar. As identified by the Central Bank of Indonesia (BI), this has been attributed to foreign investors offloading their investments in Indonesian government debt securities (SBN).

Unfortunately, there are limited theories that can explain the correlation between politics and exchange rates. One dominant perspective is rooted in electoral uncertainty, whereby election cycles exercise significant influence on a country’s macroeconomic landscape. Changes in the governing legislative or executive bodies often lead to subsequent policy adjustments. If for example, an incumbent president has sustained a positive investment environment, his predecessor might not. This is why, currency traders consistently observe election predictions and polls to assess potential political outcomes towards the currency. Furthermore, diplomatic accomplishments or beneficial policy reforms can immensely boost confidence in a currency, while damaging events may trigger currency sell-offs and depreciation. Even personal controversies involving a president, like the one faced by the United States administration in 1998—when Bill Clinton was embroiled in a scandal due to his affair with another woman—also negatively impacted the US dollar rates against other currencies.

Case from Indonesia: Rupiah’s Weakening

               The most momentous moment in Indonesia that illustrates how politics could greatly impact the currency rate was the crisis of 1998. During the Asia Financial Crisis, the rupiah experienced a depreciation rate of 55%, the highest among other Southeast Asian countries. Further down the road, the situation grew even more precarious with the emergence of rumors regarding President Soeharto’s deteriorating health. Moreover, both local and global entities questioned his ability to control the escalating upheaval in Jakarta. Finally, the currency’s depreciation reached unprecedented levels of 16,650. Besides Indonesia’s pre-existing weak economic fundamentals, political instability undoubtedly contributed to exacerbating the fragility of the rupiah’s exchange rate. This illustrates the macroeconomic structure of the nation is prone to be influenced by other non-economic factors.

Nearly a quarter-century later, on February 16, 2024, the Indonesian rupiah experienced a decline, settling at 15,666/US$. Just two days earlier, Indonesia witnessed one of the largest elections globally, featuring three presidential candidates and thousands of legislative contenders. Throughout the week, a money market analyst, Lukman Leong stated the rupiah was expected to open with marginal movement, primarily due to investor caution regarding post-election uncertainties. What makes this election in Indonesia particularly noteworthy is the candidacy of Prabowo Subianto, a figure with a notorious history of human rights abuses during the 1998 crisis. After multiple unsuccessful attempts in previous elections to secure the presidency, he now enjoys the backing of the incumbent president, Joko Widodo. Prabowo’s candidacy is perceived by many as a potential threat to democracy, as it has led to divisions among political parties, civil society organizations, and the general populace. However, at the grassroots level, a majority view it with a positive outlook, further deepening the societal rift.

Going back to the theory of electoral uncertainties, election cycles carry consequential risks to the nation’s economic stability, especially if it is done at a time when there are multiple global crises. Coincidentally, Indonesia’s election represents instability due to several situations, including heightened political tensions, controversies surrounding Prabowo, and discourses about government intervention in the electoral process. This convergence underscores the complexity and contentious nature of this event. On April 19, 2024, the Indonesian rupiah plummeted to its lowest rate in four years, reaching 16,200. Regardless, the depreciation started before the candidates registered. As tensions escalated among elites and political parties in October 2023, the exchange rate for the Indonesian rupiah has actually undergone a notable shift. Before the registration period, it hovered around Rp 15,500 per US dollar but soaked to approximately Rp 15,900 per US dollar just a day after registration concluded on October 25, 2023. This implies an apprehension from the investors’ trust in the candidates, which affects their decisions on offloading their investment.

Moreover, the discourse surrounding Prabowo’s candidacy, including concerns about human rights abuses and populist authoritarian tendencies, has the potential to instigate mistrust among Indonesia’s economic partners. In the same week when Prabowo was declared as the elected president by the General Elections Commission (KPU), experienced a decrease of 1,2% compared to last week. Other than global economic dynamics, the depreciation is also linked to the ongoing uncertainty surrounding the future fiscal policies of the new government. One of Prabowo’s programs is predicted to make investors concerned. The costly populist policies, such as the free lunch, could worsen the country’s financial health in the future. If this program is implemented, the projected increase in fiscal deficit in the 2025 state budget will weigh down the reputation of Indonesian bonds, in turn, possibly causing more depreciation.

Additionally, Prabowo’s victory prompted appeals from other candidates to the Constitutional Court (MK). They alleged that the election was systematically manipulated to benefit the incumbent president, Joko Widodo, who endorsed Prabowo. At the same time, many intellectuals, including lecturers from certain universities are criticizing the health of our democracy. This highlights the presence of opposition within civil society who dissent from Prabowo’s presidency due to his history of human rights violations and the authoritarian rhetoric he has expressed repeatedly. These developments are impacting not just the nation’s political landscape but also its financial markets. As the presidential election dispute hearings progressed, the Indonesian rupiah depreciated, regressing 0,32% to 15,900/US$. The ongoing appeals, leading up to their acceptance for examination, have generated unfavorable sentiment in the financial market. This has heightened investor apprehensions to continue their activities amidst political uncertainty. Even though the appeals were eventually rejected by the Constitutional Court, the impact has been done and might arise again in the future.

What’s next for Indonesia under Prabowo’s regime?

Despite all the controversies, Prabowo’s win is often perceived as a continuance of President Joko Widodo’s development plans. Both Prabowo and Widodo have emphasized the importance of infrastructure development, poverty alleviation, and economic growth during their campaigns. Prabowo’s win may be seen by some investors as a part of Joko Widodo’s sustaining strategy, albeit with potentially different approaches or emphases. However, it has been proven not enough. Even after the Constitutional Court rejected the appeals, the rupiah remains around Rp 16,200, showing little to no change. The decision lacks sufficient strength to convince investors and attract capital inflows into the country. If this continues, it will exert considerable influence on economic activities, notably influencing investor confidence, import-export activities, and inflationary pressures stemming from higher commodity prices. Furthermore, on the fiscal side, state revenues may rise along with expenditures. In addition, this will lead to a reduction in purchasing power for individuals and a slowdown in economic growth.

To ensure economic stability, Prabowo stated that he is devising strategies to ensure that the value of the rupiah remains within the bracket of Rp15,000 to Rp15,400 per US dollar by 2025. The new government aims to stabilize the rupiah exchange rate through the reinforcement of pro-market monetary operations strategies to enhance the effectiveness of monetary policy, employing a five-step approach. Under the new regime, the government, in collaboration with coordinating ministries and the central bank, needs to craft effective strategies to stabilize rupiah exchange rates, while strengthening the economic fundamentals. This is crucial to not only reducing the fluctuations but also continuing the sustainable economic development of the previous administration.

Agustinus Allan Porajow
Agustinus Allan Porajow
As a penultimate political science student, Agustinus is focusing his research on the fields of global economy, sustainable energy, political communication, and accessibility. He is currently serving as the Under-Secretary-General of Communication and Outreach at the United Nations in Indonesia, while actively utilizing his acquired knowledge from Universitas Gadjah Mada (UGM) to trigger a positive impact around the world.