The past few months have seen a strengthening of the Rupiah
against the US Dollar. I have been asked by quite a few people
in Bali whether this strengthening is going to continue as
it can have quite an impact on those in business.
Is the Rupiah really getting stronger?
First of all we need to consider if it actually is getting
stronger. There is no question if you are comparing it to
the US Dollar where it stood at over Rp9,000 to the dollar
for quite some time. If you have been following its relationship
with other major currencies however, the movement has not
been so significant. What has really happened over the past
few months is that the US Dollar has weakened against other
currencies, including minor Asian ones. If you are a regular
reader of this column you may recall in the April 4 issue
my report on Financial Partners’ seminar at the Bali
Hyatt in March when our currency expert predicted that the
British Pound would rise to $2 and that Asian currencies,
including the Rupiah, were also likely to rise against the
US Dollar. The pound indeed reached $2 although it has fallen
back slightly since and Asian currencies have also strengthened
as forecast.
So what factors affect the Rupiah?
As explained in the previous paragraph the movement of the
Rupiah often has nothing to do with what is happening in Indonesia
but relates to what is happening to other currencies. It can
also be affected by internal factors. On the positive side
the country is perceived to be enjoying relative political
stability under the present regime and this is good for the
stability of the currency. Inflation is reasonably under control
and this also helps. The stock market is also doing well and
this is attracting money from international investors.
Another factor, and one which has a potentially negative impact,
is that the Rupiah and other currencies that offer high rates
of interest can be affected by the ‘carry trade’.
This is a concept where money is borrowed in one currency
at low interest (such as the Japanese Yen) and placed in another
currency (such as the Rupiah) where it can earn a high rate
of interest. If there is no currency movement this produces
a significant profit. Should the higher rate currency appreciate,
and this could be accelerated by large inflows of money, then
there would be currency gain as well as the gain from the
interest rate differential. In recent times this is how many
institutional investors, hedge funds etc. have made a lot
of money.
But there is a downside
Before you rush out to borrow Yen to invest in Rupiah or even
US Dollars you need to be aware of the downside of the carry
trade. Should the large investors see any hint of a possible
fall in the higher rate currency or a reduction in the interest
rate margin in they will quickly take their money out or,
to use the technical term, ‘unwind their positions’.
Should this happen on a large scale it could have an impact
on the currency, particularly a ‘soft’ currency
like the Rupiah. Small investors trying to make similar profits
are the ones most likely to be caught out as they cannot move
as quickly as the large players. Similarly if confidence in
the economy fell, a lot of ‘hot’ money could come
out of the stock market, precipitating a further fall in the
currency. There is money to be made in the currency markets
but there are also high risks so it is not a field for the
amateur.
Which currency should you hold if you run a local business?
The conventional wisdom is that your main holding should be
in the currency of end use. So for example, if you are British
and plan to retire to the UK you should be saving in pounds
sterling. If you plan to retire in Bali then it is not advisable
to hold just Rupiah, but your longer term money could be in
a mix of Sterling, Euro or Dollars. If you run a business
in Bali then it would be wise to hold Rupiah to the extent
that you have Rupiah commitments, such as wages, local suppliers
etc. If you hold only US Dollars then you will find your costs
go up when the Rupiah strengthens, as has been the case recently.
However, it is probably sufficient to cover Rupiah commitments
for perhaps just one year, since any appreciation of the local
currency against major currencies is unlikely to last for
long, based on experience of the past.
While a strong Rupiah may be good for a number of reasons
it can also be a problem for exporters. Fortunately most other
Asian currencies have appreciated at the same time so it has
not affected competitiveness but it can still result in reduced
margins. All these things should be factored in when calculating
prices, signing contracts etc. A profitable business can easily
become a loss-making one if there are large swings in currencies.
So which way will the Rupiah go?
A strengthening against the US Dollar was predicted in March
and that has indeed occurred. Whether it continues in the
short term depends on both external factors such as the strength
of the US economy, US interest rates etc. as well as internal
factors such as Rupiah interest rates and political issues.
Perhaps the only thing we can predict with certainty is that
the exchange rate is unlikely to remain the same! We cannot
safely assume it will move up or down in the short term, although
the long term trend is well established. (When I first came
to Indonesia in 1983 the rate was Rp600 to one US Dollar!)
The safest strategy is to base long term plans on the probability
of the Rupiah falling against major currencies but short term
planning should allow for the possibility of the currency
moving either way.
Colin Bloodworth is a senior adviser with Financial Partners
International. The opinions expressed are his own. If you
have any questions related to personal finance you may contact
him at 021 520 8099 or colin.bloodworth@financial-partners.biz
