Business

Indonesia's weakening rupiah challenges government

Foreign tourists on a traditional boat at Kuta beach, Bali, Indonesia Image copyright Getty Images
Image caption Indonesia earns more than $10bn a year from its tourism sector

The mood at the Harco electronics department store in central Jakarta is grim. The bright blue neon lights and strains of Indonesian pop music do nothing to lift the spirits of shop-owners here.

Business is slow, and it's not what they're used to.

For these retailers there's one central problem: the value of the currency. The rupiah has lost 10% of its value against the dollar since last year. And it's a problem that is dogging Indonesia, even while the country welcomes delegations from around the world to the World Economic Forum and the president promises stronger growth.

The measures now being introduced to tackle the problem include lifting visa fees for tourists and tax changes in the hope that will lift the rupiah's value.

Many store owners in Harco say they've seen their neighbours' shops close down, or go out of business because of the drastic fall in the currency.

Eddie Widjaja has been running his store Edicom electronics for the last decade in Harco.

"We sell in rupiah, but we pay to the dealer in dollars, so that means our costs have effectively gone up by 20 to 25%," he tells me as he shows me around his small store.

"We can't increase our prices by that much, there's too much competition here in this mall. I'm not going to get involved in a price war - that's just a race to the bottom. I'm hopeful my good service will keep customers coming back."

Image caption Shop owner Eddie Widjaja says his costs have risen by up to 25% because of the weaker rupiah

'Big challenge'

The slowdown in sales because of the volatility in the rupiah isn't limited to laptops. Car and motorcycle sales dropped by 20% in February.

South East Asia's largest economy has been struggling with the drastic decline in the rupiah, which is the worst performing currency in Asia this year.

The Indonesian president Joko Widodo has said the weakening rupiah is his top concern and he has been in several meeting with economic ministers this month to discuss it.

"The weak rupiah is quite a big challenge to business," said Suryo Bambang Sulisto, chairman of the Indonesian Chamber of Commerce. "Just imagine if you're an importer, and you have to buy dollars to import - what will you do then?

"You're hit especially hard if you're borrowing in US dollars. Some say it's good for exporters - but not really, because a lot of exporters import their raw materials. So it hurts them too."

Image copyright Getty Images
Image caption Indonesia hopes its visa initiative will boost the number of tourists

Welcoming tourists

The government has come up with a slew of economic packages ranging from tax incentives, to a visa-free initiative in the hopes it will convince foreigners to buy more Indonesian goods, to boost the value of the rupiah.

Until recently many western tourists had to pay $35 on arrival in Indonesia for a visa. But under new rules that took effect this month, many holidaymakers will be able to enter for free.

The move is a bid to attract more tourists to Indonesia's tourist hot-spots like Bali and Lombok.

"In my view these six policies are only a part of a long list of policy reforms to stabilize the rupiah," says Wijayanto Samirin, the Indonesian vice president's special economic advisor.

"The tourist policy has worked for other countries like Malaysia and Thailand. We currently get 9 million tourists a year - Malaysia gets 27 million a year.

"Assuming one tourist brings $1,000 - imagine how much money will be spent here - and what impact that would have on our rupiah.

"If we can make it easy (for people to come here) then we should expect a flood of tourists from abroad, and a flood of money too."

Image copyright Getty Images
Image caption The rupiah's depreciation has shaken many Indonesians

There appears to be no impact yet though - although the policies have already come into practice. The currency is still trading at more than 12,900 rupiah to the US dollar - nearing decade lows.

Investors' concerns

But some experts say the measures may not have an immediate or the desired impact and are not addressing the fundamental problems which are undermining the rupiah's value.

"The current volatility in the Indonesian rupiah is down to three factors," says Ben Bingham of the IMF, "the strength of the US dollar, political uncertainty and an unfriendly business environment - shoddy infrastructure and an inefficient bureaucracy.

"There's nothing Indonesia can do about the first factor, but it can certainly work towards improving the others."

In Harco, store-owners close up after another dismal day of sales. The gloomy faces on many of the shopkeepers underline just how precarious the economy has become.

While Indonesia's economic environment is still strong, the rupiah's depreciation has shaken many Indonesians. It is a psychological barometer of how well this country is doing. Over the last decade Indonesia has been heralded as a comeback kid - and a strong and stable rupiah was part of that story.

Any prolonged instability will be seen as a sign of weakness - and a cause for concern amongst even the most confident of Indonesia's investors.

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