Economists Reveal Three Conditions for the Rupiah to Strengthen Again, What Are They?

JAKARTA - Head of Permata Bank Economist Josua Pardede said the opportunity for a reversal of the trend of weakening the rupiah exchange rate in the short to medium term remains open but depends on the fulfillment of three main conditions.

First, global pressures have eased, for example, US interest rates have not increased again or the dollar has weakened. Second, domestic confidence has improved through clarity of fiscal measures and convincing policy communication.

Third, the flow of funds is returning more stably, said Josua when contacted by Antara in Jakarta, quoted on Wednesday, January 21.

He reminded that currently the market assesses the risk of the rupiah tends to weaken and there are even predictions of potential movement beyond Rp17,000 per US dollar if sentiment does not improve. Meanwhile, seasonal factors, such as approaching the period of Ramadan and the season of dividend distribution, also have the potential to increase demand for dollars.

"Therefore, the mitigation of the central bank is not enough to rely only on routine stabilization measures in the foreign exchange market," said Josua.

According to him, intervention efforts are still important to prevent too rapid weakening and maintain market confidence, especially since the central bank is seen to be more active in holding weakening close to Rp17,000 per US dollar, including through strengthening communication.

However, it is clear that the root of the problem is the risk premium and market confidence, so BI needs to maintain rupiah liquidity so that the market does not panic, ensure that liquidity management instruments support stability, strengthen foreign exchange supply through coordination of foreign exchange policy and capital flow management, and most importantly, strengthen the commitment to fiscal discipline and independence of monetary decision-making so that the perception of risk decreases.

In general, he noted that the weakening of the rupiah, which is approaching Rp17,000 per US dollar recently, is read by market participants as a combination of global and domestic sentiments.

"In the last two days alone, the rupiah has moved in the range of 16,923 per US dollar and then broke the weakest record of around 16,988 per US dollar, so that the level of 17,000 became a psychological anchor that the market was very concerned about," he said.

Globally, the direction of the dollar and US interest rates is still the main determinant because it affects the flow of funds to developing countries, including Indonesia.

"There is a phase when the dollar weakens slightly, but the market remains cautious waiting for US economic data and US policy dynamics that increase uncertainty, so that the demand for safe haven assets easily emerges again when sentiment worsens," Josua explained.

Meanwhile, from the domestic factor side, there are market concerns about the risk of widening the deficit and the financing needs of government programs, coupled with concerns about the perception of central bank independence after the issue of appointing figures close to power to the ranks of the central bank.

The combination raised Indonesia's risk premium, reflected in the yield of 10-year government bonds which rose by around 25 basis points (bps) to 6.32 percent.

"Is this an alarming alarm? In a direction, the market is indeed signaling vigilance because the weakening of the exchange rate accompanied by an increase in yields shows that there is an element of trust concerns, not just seasonal factors," said Josua.

On the other hand, he also reminded that it was not automatically called a crisis, because Indonesia's macroeconomic fundamentals tend to have resilience where inflation is relatively controlled and foreign exchange reserves in 2025 are recorded as high, so that the resilience to dampen the turmoil still exists.

"What needs to be noted is the quality of policy responses and the consistency of fiscal policy stance. So if the market sees a clear direction of policy and discipline is maintained, the pressure on the exchange rate usually eases faster," said Josua.