Banking Services In The Midst of a Plunging Rupiah

Ilustration: Banking building.

by Karnoto Mohamad

THE DROP in the value of the rupiah is worrying business owners. Indonesia’s currency, once strong, has weakened to Rp 16,269.90 per US$1 on April 22, 2024—the weakest it’s been in the past four years, with a decline of 5.71% from the start of 2024, when it was Rp 15,390 per US$1. This has particularly concerned those in the manufacturing sector, which heavily relies on imported raw materials. As the US dollar strengthens, production costs rise, impacting the selling prices of goods.

In response, Bank Indonesia (BI) raised its benchmark interest rate by 25 bps to 6.25% at the end of April, with banks likely to follow suit by increasing credit interest rates. BI Governor Perry Warjiyo explained that the rate hike aims to stabilize the rupiah exchange rate amidst growing global risks and to ensure inflation remains within the target of 2.5±1% in 2024.

Analysts warn that if the rise in the US dollar and interest rates leads to reduced market demand and sales, businesses may scale back operations to avoid losses. The slowdown in middle-class spending has already affected industries like automotive, with sales declining despite high production capacity.

The impact of these economic shifts is far-reaching. For instance, the declining purchasing power of the public affects domestic GDP growth, as household consumption contributes significantly to it. Consequently, banks are expected to be more cautious in extending credit amidst the fluctuating value of the rupiah, as it can impact inflation and fiscal conditions.

According to Haryanto T. Budiman, Chairman of the Indonesian Bankers Association, banks must carefully assess loans in foreign currencies, ensuring they match the income currencies of clients to avoid currency mismatches and liquidity constraints.

Furthermore, liquidity constraints are not limited to foreign currencies; the availability of rupiah funds has also tightened. Although banking credit has increased, third-party funds (DPK) have seen slower growth, potentially impacting credit availability.

Despite these challenges, the banking industry has shown resilience, with improved service quality and stable lending rates. However, banks need to remain vigilant amidst unfriendly macroeconomic conditions, including rising global oil prices and geopolitical tensions, which can further strain the rupiah and impact economic stability. In conclusion, as long as economic imbalances persist, particularly widening twin deficits, the rupiah remains vulnerable, necessitating careful monitoring and proactive measures to mitigate risks and stabilize the economy. (*)