Rupiah Passes a Psychological Barrier

(8/27/2005)

The exchange rate for the Indonesian Rupiah to the U.S. Greenback passed the critical psychological barrier of Rp. 10,000 on August 24, 2005 – trading at Rp. 10,330 to the dollar, marking the most dramatic decline in the Rupiah's value in three year.

Diminishing faith in the Rupiah was fueled by record prices being paid for crude oil of US$68 a barrel and growing concern that the fundamental assumptions underlying Indonesia's State budget were becoming increasingly unrealistic.

Meanwhile, President Susilo Bambang Yudhoyono is promising closer coordination with Bank Indonesia who have raised interest rates in order to head off a free-fall in the value of the Rupiah.

The President is under growing pressure to reduce or completely remove burdensome government subsidies on retail fuel prices to restore faith in the National currency. Based on fuel prices of US$66 per barrel, experts predict that Indonesia will incur US$10.6 billion in fuel subsidies for the current year unless currents subsideis are addressed.

The last fuel increase by the government took place on March 1, 2005.

Tourist Experiencing a Windfall

Meanwhile, tourist visitors to Bali are enjoying an added bonus in their spending power as local shopping, dining and transportation costs – generally all priced in Rupiahs – have became a bargain against the declining value of the Rupiah. The same cannot be said, however, for hotels and villa prices which are overwhelmingly based in U.S. dollars, making them immune from the recent shift in the Rupiah's value for tourists spending foreign currencies.