USD/IDR: Revising up our forecast on rising geopolitical risks (2024)

Key Points

• The Indonesian rupiah (IDR) has weakened past the 16,000 level versus the US dollar today. This has mainly been driven by a recent strengthening of the US dollar, which has not been reflected in the IDR as the Indonesia market was closed over the past week for the Eid al-Fitr festival. Indeed, the broad dollar index has broken the 105 level with the next resistance at 107 (Chart 1), with markets further dialling back US rate cut expectations on hotter than expected US CPI print.

• We have revised up our USD/IDR forecasts amid rising geopolitical risks. We now forecast the USD/IDR at 16200 (15,850 previously) in the next 3 months before strengthening modestly to 15,650 in 12 months on anticipation of US rate cuts and some stepping down of Middle East tensions (Table 1).
• The risk is that the USDIDR could test the peak of around 16,600 seen during the Covid period in early 2020, amid a further sharper rise in global risk premium resulting from escalating geopolitical tensions in the Middle East, which could have significant negative implications for global growth and commodity prices. Indeed, Israel has vowed to retaliate against recent Iran’s drones and missile attacks over the weekend. It is a race for the international community to urge Israeli’s restraints to avert a full-blown war in the Middle East region.
• Moreover, the Indonesian rupiah can no longer count on its current account surplus. Indeed, since Q2 2023, Indonesia’s current account has slipped back into deficits on the back of falling commodity prices (Chart 2). With investment picking up, driven by many public infrastructure plans, we forecast Indonesia’s current account deficit will be 0.3% of GDP this year.

• At the same time, while election uncertainty has eased with Prabowo Subianto winning the presidential ticket in just one round of election on 14 February, we have highlighted that domestic policy transition risks remain. This is regarding the forming of a governing coalition and key cabinet appointment, particularly who will be replacing long-standing finance minister Sri Mulyani. Sri Mulyani has been credited by foreign investors for her prudent management of Indonesia’s fiscal position.
• Given the rise in rupiah volatility, the BI has been forced to intervene in the FX market. While this may stabilize the IDR at current levels, it will do little to engineer sustained IDR strength. In our view, US rates will have to come off before we are able to see sustained strength in the IDR. For now, markets are thinking the first US rate cut will only come in September.
• Given that rupiah stability is one of the key tenets of BI monetary policy, we think that the risk of another BI rate hike (while currently not in our baseline) have clearly risen, even if this would be at the expense of growth.