Downward pressure is mounting on the rupiah, sending the Indonesian currency falling below the psychologically important level of 13,000 to the dollar for the first time in 17 years.

The Indonesian government is seeking to not only reduce the nation's current-account deficit but also promote economic growth. To support the policy, the Indonesian central bank surprised markets by cutting its benchmark interest rate in February.

The plunge in the value of the rupiah has fanned anxieties instead of achieving the kind of stable growth that the government and central bank desire.

The exchange rate of 13,000 rupiah to the dollar has a special meaning: The currency was last at that level in August 1998, when the Indonesian economy was pulling out of the Asian currency crisis. No wonder the currency's recent depreciation has caused widespread jitters among Indonesians.

President Joko Widodo on Wednesday, coming out of a meeting with economic ministers, made an ambiguous and brief comment about optimism and caution when asked about the weaker rupiah.

As far as optimism goes, the country's economic fundamentals remain favorable, and the stock market has risen 8% since Widodo took office on Oct. 20. But the rupiah has stayed at the 13,000 level against the dollar since the beginning of this month, a 10% fall since the inauguration.

The rupiah has been under strong selling pressure due to a number of reasons, including the fact that Indonesia's current-account balance is in the red for a third year in a row. This reflects the economy's heavy reliance on foreign capital.

During the financial turmoils that rock the world from time to time, investors tend to withdraw their funds from some countries with current-account deficits.

Sure enough, Indonesia experienced a rapid exodus of capital amid the so-called "Bernanke shock" of May 2013, when Ben Bernanke, then chairman of the U.S. Federal Reserve Board, suggested that the Fed would begin slowly easing off its dollar-printing quantitative easing policy.

Now the Fed appears poised to actually raise interest rates. It would be a major shift, with global ramifications. Indonesia would be shaken.

The rupiah's next key rate is 14,500 to the dollar. A fall below that level would bring the rupiah to where it was amid the Asian currency crisis.

Even though the rupiah is at a perilous level, there is little sense of crisis in the country. Again, there are numerous reasons for this, including the boost that a weak currency gives to a nation's exports.

Bank Indonesia Gov. Agus Martowardojo denies that the central bank will take part in the ongoing game of "competitive devaluations" that central bankers are playing.

But skeptics wonder whether any central banker would admit to entering the game. The Widodo administration wants the economy to be sbaik by domestic demand as well as by domestic and foreign investment. The government thus has successively introduced measures to increase spending on infrastructure improvements and to promote investment opportunities.

Besides lifting exports, a weaker rupiah benefits Indonesia fiscally. Indonesia is rich in natural resources, and the government receives royalties tied to them mostly in dollars. According to Finance Minister Bambang Brodjonegoro, government revenues increase by more than 2.3 trillion rupiah ($174.17 million) for every 100 rupiah the currency depreciates against the dollar.

A series of measures adopted by the Widodo administration, such as tax breaks for exporters, will not hit pay dirt anytime soon. If monetary turbulence shakes Indonesia in the meantime, the nation's economy will be greatly damaged.

Capital flight is by no means an absurd scenario. Indonesian policymakers are walking a tightrope.
SADACHIKA WATANABE, Nikkei staff writer









Investors are increasingly worried that President Joko Widodo's drive for clean governance is falling apart amid disputes between rival law enforcement agencies--xxx-.
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