The weak rupiah: catching the tailwinds and avoiding the shoals
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The weak rupiah: catching the tailwinds and avoiding the shoals Willem Thorbecke1
© Institute for Social and Economic Change 2020
Abstract The Indonesian rupiah depreciated 50% between July 2011 and February 2020. Blan‑ chard et al. (Are capital inflows expansionary or contractionary? Theory, policy implica‑ tions, and some evidence. NBER Working Papers 21619, National Bureau of Economic Research, Cambridge, MA, 2015) showed that capital outflows from emerging markets can reduce output by increasing the cost of financial intermediation and can increase output by increasing net exports. Regression results indicate that Indonesian banks are exposed to depreciations, but that exports are not stimulated by depreciations. The findings also indicate that Indonesia’s export price index is positively correlated with commodity prices and negatively correlated with manufactured goods prices. Exporting more manufactures would reduce Indonesia’s exposure to volatile commodity prices and allow depreciations to stimulate exports. This paper considers several steps that Indonesia could take to increase its manufacturing exports. Keywords Indonesia · Exchange rate elasticities · Exchange rate exposure · Foreign direct investment · Export diversification · Technology assimilation JEL Classification F14 · F10
Introduction The Indonesian rupiah depreciated 50% against the U.S. dollar between July 2011 and March 2020. U.S. interest rate hikes and global turmoil acted as pull factors and Indonesian current account deficits and uneven fundamentals acted as push factors to generate capital outflows and weaken the currency. Blanchard et al. (2015) showed that outflows can depre‑ ciate exchange rates and increase net exports and output. Outflows from emerging markets can also increase the cost of financial intermediation and reduce output. Capital outflows during the 1997–1998 Asian Crisis depreciated the rupiah from 2400 per dollar to 15,000 per dollar, eroding bank capital and reducing financial intermediation. * Willem Thorbecke willem‑[email protected] 1
Research Institute of Economy, Trade and Industry and Center for International Development, 1‑3‑1 Kasumigaseki, Chiyoda‑ku, Tokyo 100‑8901, Japan
13
Vol.:(0123456789)
Journal of Social and Economic Development
Indonesian banks faced a mismatch between rupiah assets and foreign currency liabilities (Yoshitomi 2003). As the rupiah weakened, bank capital shrank. According to data from Bank Indonesia, deposits and lending by private domestic banks fell by almost 20% during the crisis (see Azis and Thorbecke 2004). This disintermediation contributed to Indonesia’s 14% drop in GDP in 1998. This paper investigates how the rupiah affects the banking sector and the Indonesian economy. To do this, it first examines how the rupiah/dollar exchange rate affects indus‑ try and aggregate stock returns. Standard finance models hold that stock prices equal the expected present value of future net cash flows, implying that stock prices provide informa‑ tion about future economic act
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