This year could be a tumultuous one for Indonesia with two sets of elections due to take place, bringing the presidency of Susilo Bambang Yudhoyono to a close after 10 years.
What this means for the country is unclear but the rupiah, the country’s beleaguered currency, is expected to come in for a buffeting whatever happens.
“SBY has done a good job and has tackled corruption but the push has faded over the past six or seven months. Depending on who comes into power we could see self-serving policies that harm the markets,” said Craig Chan, head of FX strategy, Asia ex-Japan, at Nomura.
The portents are established. The rupiah has depreciated more than 20% this year and broke through the psychologically important 12,000 level against the US dollar on the spot market for the first time in more than four years.
That this came in November, following numerous interventions from the government during the year, perhaps paints the most vivid picture of a currency that is difficult to tame.
As of December 27, it was still trading at Rp12,261 per US dollar.
Of course, Ben Bernanke spiced things up in May when the chairman of the US Federal Reserve introduced the possibility of the tapering of the central bank’s stimulus programme, which led to a summer (and autumn) of intense speculation as to the timing of such a move.
This hit all emerging market currencies. But the rupiah, seen as arguably the most vulnerable in Asia to such external macro events, began to drop, prompting the government to intervene throughout the year.
According to reports, the central bank says it will continue to support the currency but has not set a level that it will seek to defend.
This could be important as the elections loom into view and the political headwinds begin to bite, with HSBC expecting the currency to fall a further 5% next year.
“Can the rupiah turn the corner in 2014? Our confidence is low in this regard. Likely periods of global market uncertainty around taper will leave the Rupiah vulnerable,” according to analysis by Deutsche Bank.
“We see the currency hovering around the 11,500 to 12,000 range next year, which has worrisome implications for inflation,” Deutsche Bank added in its report.
The 11,000 level has been cited by analysts and the government alike in terms of the ideal level for the rupiah in the current economic climate, and there is clearly some way to go, with seemingly only negative distractions ahead.
More intervention may be difficult, according to Nomura, after the central bank’s exploits in 2013. “Any external pressure and the authorities might find it difficult to defend the currency,” said Chan.
“They have various currency pacts but they come with conditions and they will only be able to utilise parts of these, depending on the trigger. Then they have the IMF, which they will not want to go to,” he added.
The central bank began the year with $11.3 trillion of forex reserves, according to Trading Economics, but saw this melt away following its numerous episodes of intervention.
That said the government’s foreign currency reserves stood at $96.96 billion at the end of November, which held steady from the previous month — still a sizeable war chest with which to defend the currency.
And it is possible that nervousness about Fed tapering has all but been factored in and that perhaps the currency is stronger than some fear.
The elections, while creating a period of uncertainty, are stuffed with the usual suspects and a result capable of delivering a shock to the markets is unlikely, according to analysts.
Furthermore, Bernanke’s flirtation with tapering may already have scared off the more squeamish investors.
“The quick and easy money got out during the initial furore over tapering. What remains is the stable money,” said Adam Gilmore, head of forex at Citi.
A senior dealer, meanwhile, said there would be some smoothing from the government but no heavy-handed intervention.
That said, once election season gets under way properly, and tapering begins, the downward trend may once again become a spiral as overseas investors look to rebalance their portfolios.
With 32% of local government bonds in foreign hands — at a value of about $27 billion — the market is still largely at the whim of overseas sentiment.
“[The rupiah] could hit 12,500 in the next 2-3 months. People will be nervous. I can’t imagine a scenario where you would invest if you knew returns would be a fraction of what you invested. It will be a huge concern,” said Chan.
“In the year ahead we have the climate of loose policy globally coming to an end and it is difficult to see the rupiah trading stronger.”
The key question is: how bad can it get? Indonesia is no stranger to financial crisis or a currency crisis.
After all, it played a central role in the Asian financial crisis, following the Thai baht into obscurity, bringing much of Asia down with it. The rupiah fell about 70% between June 1997 and December 1998; although this was coupled with inflation of about 60%.
For the record, inflation hit 8.32% year-on-year in October from 4.3% in December 2012, a large jump largely due to the 44% rise in fuel prices during the year.
“Will it get to that stage? I don’t think so. The panic button would be pushed before that happens in the form of a government package or an IMF deal,” said Chan. “If the currency moves 10% in one week it would trigger a swap line. Beyond that, there could be foreign support or even a bailout.”
If there is one thing investors have learned when it comes to Indonesia and the rupiah, it is to expect the unexpected.
