International Capital Flows and Vulnerabilities of the Indonesian Economy

As a result of large and persistent capital inflows after the Global Financial Crisis, Indonesia’s currency, the rupiah (Rp), was considerably affected by the end of Quantitative Easing. In 2013 when the United States suggested an exit from monetary easing, Indonesia’s monetary policies had the positive effect of alleviating the impact by gradually raising interest rates and allowing the rupiah’s exchange rate to be remain flexible without conducting aggressive market interventions. However, the rupiah remained weak. Due to Turkey’s lira crisis in August 2018, the rupiah depreciated further. Although Indonesia has tried to stabilize the rupiah through interest rate increases and active foreign exchange interventions, its current account deficit has expanded because of an increase in imports for infrastructure investment and the depreciation of the rupiah accelerating. In order to reduce the current deficit, Indonesia was forced to take policy measures that could affect economic growth negatively, such as the introduction of import restrictions. Because the Federal Reserve indicated that it would pause interest rate increases, and because Indonesia’s monetary policies and measures proved effective, the rupiah has firmed.