Economic Volatilty in Indonesia Makes Rupiah Hard to Hedge

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Indonesia is South East Asia’s largest economy but an economic slowdown has made the country’s rupiah the worst performing currency in Asia this year. The instability makes the rupiah Asia’s most volatile currency, as well as Asia’s most expensive to hedge, Bloomberg Business explains.

State-owned companies must follow a 2013 rule that requires them to use currency hedges in their operations. Hedges mitigate the effect of currency fluctuations on revenue recorded overseas, as well as on their import costs, Bloomberg explains. Branko Windoe, President of the Indonesian arm of Financial Market Association ACI, tells Bloomberg that the volatility of Indonesia’s currency makes hedging expensive. That problem is compounded by the fact that the high volatility is driven in part by the lack of hedging.

Indonesia’s rupiah has lost 10 percent of its value compared against the dollar in the last year. That loss in value has real world consequences in transactional businesses. One electronics store owner tells the BBC that he sells his products in the local currency but pays his dealers in U.S. dollars. That means that his costs have increased by as much as 25 percent.

The rupiah’s lower value does make Indonesian goods and services cheaper for those holding other currencies. The Indonesian government is trying use those lower costs as a way to entice foreigners to buy more Indonesian goods, which in turn boost the value of the Indonesian currency. Tourism is seen as a holding untapped economic growth opportunity for the country. Wijayanto Samirin, special economic advisor to the Indonesian Vice President, notes that Indonesia currently hosts 9 million tourists annually, compared with 27 million tourists visiting nearby Malaysia.

“Assuming one tourist brings $1,000 – imagine how much money will be spent here – and what impact that would have on our rupiah,” Samirin said.

But economic policy can only go so far. Ben Bingham of the International Monetary Fund tells the BBC that factors influencing the value of the rupiah include the strength of the U.S. dollar, political uncertainty in the country and poor infrastructure and inefficient bureaucracy that hampers the business climate.