By Eko B. Supriyanto, Editor-in-Chief of Infobank Media Group
Bank Indonesia (BI) believes the rupiah is undervalued relative to Indonesia’s economic fundamentals. This was stated by BI Governor Perry Warjiyo during a press conference following the Board of Governors’ Meeting (RDG) late last month. Who believes the rupiah is undervalued?
The rupiah is currently trading at Rp16,880 per U.S. dollar (US$1)—having weakened by 0.56 percent in just a matter of weeks. What does “undervalued” mean in BI’s lexicon? The rupiah is said to be on “sale”—a massive discount—because, fundamentally, it should be stronger. Inflation is low, yields are attractive, and economic growth is rising. So, why has the rupiah “plummeted”? All of this, according to the BI Governor, is due to “global uncertainty,” causing the risk premium to rise—a scapegoat that can never defend itself.
The question is simple: if the fundamentals are so solid, why couldn’t the $1.6 billion in foreign capital inflows lift the rupiah out of its slump? Shouldn’t capital inflows, in theory, drive appreciation? This isn’t merely a technical failure. It is an empirical contradiction that silences prevailing economic theory.
It may be that the claim of being “undervalued” is not a purely scientific statement. It is a tactical—and often political—statement. It serves as a shield to mask the structural fragility of Indonesia’s economy. According to Infobank Institute’s records, there are at least three key points.
First, discussing fundamentals without addressing the structure of production is intellectual nonsense. Indonesia’s economic fundamentals have never changed. Take note! Indonesia still exports raw materials, imports finished goods, and prays for commodity prices to rise. When corporate demand for foreign exchange increases, it reflects an industry with acute import dependency. This isn’t about being undervalued. It’s about the deindustrialization we’ve allowed to drag on.
Second, this is about institutional credibility. Amid reports of the president’s nephew (Thomas Djiwandono) being appointed as deputy governor of the BI, the market has already signaled distrust. Not because the person is unqualified, but because the precedent is dangerous. When the independence of the central bank is “eroded,” the entire monetary policy apparatus loses its credibility. And, believe me, once credibility is lost, no matter how aggressive the intervention, it will be unable to lift the rupiah out of its slump.
Third, a fiscal condition vulnerable to cash flow issues. The ballooning of the state budget deficit to 2.92 percent paints a grim picture for foreign confidence. Moreover, the structure of state budget spending is deemed irrational, such as the Free Nutritious Meals (MBG) program, which consumes Rp325 trillion. Meanwhile, debt and interest payments as a percentage of state revenue continue to climb to 22 percent–23 percent.
According to Infobank’s records, the BI appears “proud” of its interventions in the NDF and DNDF markets. The USD154.6 billion foreign exchange reserves are touted as a powerful arsenal. Indeed, the reserves are substantial in nominal terms, equivalent to 6.3 months of imports—sufficient, but not extraordinary. Will they be depleted to maintain a level that was misguided from the start?
Take note! Recall the experience of 1997–1998. At that time, BI was also actively intervening, burning through foreign exchange reserves to prop up the rupiah. The result? BI ran out of ammunition, and the rupiah plummeted even further. History teaches us that fighting market forces with intervention without fundamental improvements is like bailing water from a leaky ship.
BI does indeed have a mandate to maintain the rupiah’s stability. But stability doesn’t mean defying gravity. Sometimes, depreciation is an honest mirror that must be faced, not a foggy glass that’s constantly polished.
The claim of “undervaluation” is, in truth, a misdiagnosis because it focuses on the symptoms, not the underlying issue.
If the rupiah is indeed undervalued, then the solution is not market intervention that “drains” foreign exchange reserves. Nor is it enticing foreign investors with the promise of lucrative returns, which only creates new dependencies. The solution is an industrial revolution—building the capacity to produce the goods and services we have been importing all this time. The solution lies in political discipline—protecting institutions from the interference of family and group interests. That is clearly not the Bank of Indonesia’s (BI) role.
The rupiah at Rp16,880 may indeed be undervalued by econometric calculations. But politically, it is a true reflection of Indonesia’s half-hearted development. And no market intervention can beautify the reflection of an ugly face.
So, what needs to be done is to first address the issues at home. Don’t always blame the unpredictable global economy. The government must immediately clarify its fiscal policy. BI must prove its independence. All of this is to restore the credibility of policy.
And without those improvements, the rupiah will continue to “groan” and is likely to “burn.” Rupiah, oh rupiah. How unfortunate is your fate.
