The weak rupiah: catching the tailwinds and avoiding the shoals

Area of Science:

• Economics
• International Trade
• Macroeconomics

Background:

• The Indonesian rupiah experienced a 50% depreciation between July 2011 and February 2020.
• Emerging market capital outflows can impact output through financial intermediation costs and net exports, as per Blanchard et al. (2015).
• Indonesian banks show exposure to currency depreciations, but export performance is not stimulated by these events.

Purpose of the Study:

• To analyze the relationship between currency depreciation and Indonesia's export performance.
• To investigate factors influencing Indonesia's export price index.
• To identify strategies for increasing Indonesia's manufacturing exports and reducing commodity price volatility.

Main Methods:

• Regression analysis to assess the impact of depreciations on Indonesian banks and exports.
• Correlation analysis of Indonesia's export price index with commodity and manufactured goods prices.

Main Results:

• Indonesian banks are vulnerable to currency depreciations.
• Depreciations do not stimulate Indonesian exports.
• Indonesia's export price index is positively linked to commodity prices and negatively to manufactured goods prices.

Conclusions:

• Diversifying exports towards manufactured goods can mitigate exposure to volatile commodity prices.
• Increased manufacturing exports can enable currency depreciations to stimulate export growth.
• Policy recommendations are considered to enhance Indonesia's manufacturing export capacity.