The effects on Indonesia of the strengthening US Dollar

The exchange rate of the US Dollar (USD) has become stronger in recent years.
Several weeks ago, The US Federal Bank (The Fed) announced a plan to increase the interest
rate. This led to speculation about the influence of this on all currencies that depend on the
USD, including the Indonesian Rupiah (IDR). If this problem is not solved as soon as
possible, this could lead to a crisis in developing countries such as Indonesia. This essay will
first explain the USD become an international currency, how it influences the Indonesian
economy, problems with the exchange rate, and possible solution for Indonesia.
Starting from the history that brought the USD to international currency. When World
War Two ended, some countries reached an agreement called Bretton Woods, which led to the
use of gold as a global standard currency. At that time many economies of the world, except
the United States were devastated by the war. This causes them to rely on loans granted by
the United States. These loans were given in USD. As a guarantee, United States received the
gold owned by these countries. As a result, United States automatic control of all the gold in
the world and thus only the US dollar whose value backed by gold. In practical terms, this
means that the USD has replaced gold as a source of liquidity into the world economy and
financial system's base. By implication, every country build foreign exchange reserves in
USD which can be exchanged immediately for the country business. At this time the United
States currency is becoming an international currency.
Until now, the structure of the Indonesian economy has been massively integrated
with the structure of the global economy. The economy crisis in 1998 which fell down IDR to
almost Rp 17.000 decided government to loan money from International Monetary Fund
(IMF). IMF is a financial institution that established by winning countries in World War
Two. This reforms has been creating a pattern how the Indonesian economy operates such as
privatization and liberalization. This is where the starting point of Indonesia's economic
dependence on the US dollar, given the dollar became the main currency in international
trade. Furthermore, the Indonesian stock market is currently dominated by foreign investors
where in 2015, 65 percent of the investment portfolio of the Indonesian stock market is still
dominated by foreign investors. This dominance makes the Indonesian stock market
dominated by global finance capital preferences that make Indonesia's economy vulnerable to
economic developments abroad. It is why the information on the improvement of US

economic growth is responded quickly by foreign investors who shift their funds from
Indonesia to the US. Conditions finally make a systematic weakening of the value of the
rupiah against the US dollar.
As seen on the graph below, in 2011 the value of 1$ was equal to around Rp 8.500.
The rate gradually increased to Rp 9.500 in 2012 until rose significantly to over than Rp
10.500 and Rp 12.000 in 2013 and 2014, respectively. Now, the US Dollar exchange rate go
up to about Rp 13.500.

The Indonesia Rupiah (IDR) per 1 United States Dollar (US)

13 Aug 2010 00:00 UTC - 12 Aug 2015 02:35 UTC

Source: http://www.xe.com

During five years (2011-2015), overall the gap between the IDR and USD widened.
The trend shows the exchange rate of Rupiah to US Dollar is falling every year. There are
several reasons for the steep decline of the rupiah both domestic and global.

Firstly,

Indonesia is disturbed by falling commodity prices (particularly crude oil, crude palm oil and
coal), a trend caused by the slowgoing global economy and particularly by Chinas economic
slowdown. Some analysts, in fact, see the fall in commodity prices as having a more heavy
negative impact on the performance of emerging markets currencies than expectation about a
Federal Reserve interest rate hike. Secondly, at the moment when the emerging and
developing countries to be aware of the impact of interest rate hikes while the Fed's decision
to delay the announcement, the world was shocked by the problem of the Greek debt crisis.
Before the Greek debt crisis find a solution, the world was shocked by the collapse of stock

prices in the Chinese capital market which caused a panic not only financial markets, but also
global economic actors. For Indonesia, these pressure need to watch out because will effected
on the national exports and cause a lot of economic problems that arise in the future.
To overcome with this situation, Indonesian government must find quick solutions.
The President, Joko Widodo asked the businessmen exporter opened up new markets and take
advantage of the weakening of the rupiah against the US dollar. "Usually we only see the
traditional markets, such as America, Europe, China, Japan, Korea. In fact, many other
countries that can enter the market," said President. Secondly, Bank of Indonesia Governor
Agus Martowardojo convened around 100 CEOs of local companies in his office as he
introduced the new rule contained on Peraturan Bank Indonesia (PBI) regulating the
countrys foreign debts, at the same time ordering them to be more prudent in borrowing new
dollar loans. The rules include the requirement for local companies, to have a liquidity ratio
minimum of 50 percent if they want to borrow dollars (Sambijantoro, 2015). Thirdly,
depreciation of Rupiah must be addressed as a trigger for the government to boost economic
growth. For example lifting visa fees in the tourism sector and tax change will open the
entrance for tourist visiting Indonesia. Moreover, Indonesia should increase the economic
growth rate upon the rate inflation. The government also should accelerate building good
infrastructure in every region which effect the rate of consumption, then spend the
government budget wisely, and give optimism to foreign investors.
To sum up, as the structure of global economy has integrated since World War Two
ended and the Indonesia economic crisis in 1998 it is very difficult for Indonesia apart from
every economic decision made by US. During last five years, the exchange rate has been
showing that the value of Rupiah is continue to weak. The internal and external factor must
be handled sooner before another economic problems arise in the future. Furthermore, while
every country waiting the announcement from The Fed, Indonesia have to improve their
economic policy in order to strengthen the value of the Indonesian Rupiah. So, regardless
whether or not the Fed increasing the interest rate, Indonesia has already a stable condition
for a long term.

References
Richard Cox et al. Why is Indonesias Rupiah Weakening? Global & Domestic Factors.
Retrieved 11 Agustus 2015.
http://www.indonesia-investments.com/news/todays-headlines/why-is-indonesia-s-rupiahweakening-global-domestic-factors/item5833
http://www.xe.com/currencycharts/?from=USD&to=IDR
Karishma Vaswani. Indonesia's weakening rupiah challenges government. Retrieved 20 April
2015.
http://www.bbc.com/news/business-32357063
Satria Sambijantoro. Slower dollar debt growth as BI rule takes effect. Retrieved 20 March
2015.
http://www.thejakartapost.com/news/2015/03/20/slower-dollar-debt-growth-bi-rule-takeseffect.html