Indonesia’s central bank expects billions of foreign funds to return – supporting the rupiah

SINGAPORE — The Indonesian rupiah is expected to strengthen further against the U.S. dollar as foreign investors pile billions back into the country’s financial market this year, according to the Indonesian central bank governor.

The Indonesian currency has stayed roughly flat against the U.S. dollar so far this year. The rupiah lost around 1.1% to the greenback in 2020 when economic uncertainties caused by the Covid-19 pandemic led foreign investors to exit emerging markets in search of safer investments elsewhere.

“Fundamentally, our rupiah (is) still undervalued so there is potential our rupiah will be strengthened and stabilized,” Perry Warjiyo, governor of Bank Indonesia, told CNBC as part of the coverage of the World Economic Forum’s Davos Agenda.

The governor cited several factors that could support the rupiah’s rise.

First, he said inflation is currently “very low” in Indonesia. Higher inflation erodes purchasing power and therefore reduces the value of a currency.

Warjiyo said any rise in inflation will come in the fourth quarter this year at the earliest. Until then, the central bank will keep monetary policy loose, he said.

Bank Indonesia maintained its benchmark interest rate at a record low of 3.75% at its latest meeting last week. The central bank last raised rates in November 2018.

Another factor supporting the rupiah is a “very low” current account deficit that is expected to be between 1% and 2% to gross domestic product this year, said the governor. A deficit on the current account occurs when more goods, services and investments are flowing into a country than those going out. When the deficit is large, the currency typically weakens.

In addition, investors may find Indonesian assets “attractive” for their potential higher returns — thereby increasing demand for the rupiah, explained Warjiyo. He estimated an inflow of around $19.6 billion of foreign funds this year going into the Indonesian financial market.

“With our fundamentally undervalued exchange rate, large interest rate differential and other positive factors, we continue to believe foreign portfolio inflow will be coming to Indonesia,” said the governor.