Economic news every day always presents information on the Rupiah exchange rate. Usually, information on the exchange rate of Rupiah against USD is presented. The movement of the Rupiah exchange rate is always fluctuating. Sometimes it strengthens, sometimes it weakens. If you don't understand about buying and selling rates, and their use, please read the post: Understanding Buying and Selling Rates.
However, have you ever wondered: If the Rupiah exchange rate strengthens or weakens, what impact will it have on the business sector? Does a stronger exchange rate mean that it will be better for the business sector in Indonesia? In this post, I will discuss it.
The strengthening Rupiah exchange rate indicates that the country's economy is getting better. This means that when infrastructure development runs smoothly, people's purchasing power increases, including the recent tax amnesty policy that has succeeded in absorbing positive sentiment from the Indonesian people, the Rupiah exchange rate will strengthen.
However, the Rupiah exchange rate which continues to strengthen without any weakening at all, also has an unfavorable impact. What is the intended unfavorable impact? The impact is on the trade balance (especially on exports). The trade balance is a record of export and import trade within a certain period. Indonesia is said to have a surplus in the trade balance if the value of exports is greater than imports. Meanwhile, the trade balance is said to be in deficit if the value of imports is greater than exports (expenditures abroad are greater than imports into the country).
The usefulness of the trade balance is one tool to measure the strength of the country's economy. The trade balance surplus means that Indonesia has income in foreign currency. This foreign currency income is used to cover foreign debts, obtain foreign loans and foreign transactions. Vice versa, if there is a deficit, the government will lack money to pay foreign debts, foreign transactions cannot run more smoothly.
Well, one that affects export and import transactions is the currency of a country. Bottom line:
When the exchange rate strengthens --> Favorable for imports, detrimental for exports.
When the exchange rate weakens --> Favorable for exports, detrimental for imports.
"How can that be, Brother Heze?" Ask you
Okay, I will explain with illustrations. I provide an illustration using the exchange rate of Rupiah against USD.
Due to various government policies that generated positive sentiment, the rupiah exchange rate strengthened to:
Buying rate: 1 USD = Rp11,700.
Selling rate: 1 USD = IDR 12,000
Because the Dollar is strong and the American government is issuing new policies, within a certain time the exchange rate finally weakens to:
Buying rate: 1 USD = Rp11,900.
Selling rate: 1 ISD = Rp12,200
IMPORT CASE
If companies in Indonesia import goods from Uncle Sam's country as much as $1,000, then Indonesia must convert Rupiah into USD. Since import means buying goods from abroad, Indonesia must provide foreign currency (buy dollars).
Referring to the example above, the selling rate at that time was 1 USD = Rp. 12,000. So, Indonesia had to exchange Rp12,000,000 (Rp12,000*$1,000) in rupiah in order to be able to pay the $1,000 price for imported goods.
If the exchange rate weakens to 12,200, importers must exchange IDR 12,200,000 (Rp 12,200*$1000). This means that if the Rupiah exchange rate weakens, importers must provide more money to pay for import transaction fees. So, it can be concluded, if the Rupiah exchange rate weakens, it will have a negative impact on import transactions.
EXPORT CASE
When an Indonesian company sells goods to Uncle Sam's country (exports), with a selling price of $4,000, Indonesia will receive incoming money in foreign currency (USD). Exporters must exchange their money in Rupiah currency on the foreign exchange market, so that it can be used for domestic transactions (exporters must sell Dollars to get Rupiah).
Referring to the above exchange rate, exporters must convert USD into Rupiah. And exporters will get a value of Rp.46,800,000 ($4,000*Rp.11,700).
If the Rupiah exchange rate weakens to Rp11,900, then exporters will get more money than converting USD into Rupiah, which is Rp47,600,000 ($4,000*Rp11,900). So, if the Rupiah exchange rate weakens, it will have a positive impact on export transactions. Because with the weakening of the Rupiah exchange rate, exporters will get more incoming money.
Which is better, the Rupiah weakens or strengthens?
In general, the strengthening exchange rate indicates that Indonesia's economic condition is getting better and more stable, and conversely if the exchange rate continues to weaken, it means that the Indonesian economy is sluggish. But...
If the Rupiah exchange rate continues to strengthen, the impact will be on export transactions. The continuous strengthening of the Rupiah exchange rate will harm export transactions. This means that if the Rupiah continues to strengthen, the income received by the state will decrease, although it will also provide benefits from the import side (because importers pay lower costs). So, if Indonesia has a lot of export transactions and the Rupiah continues to strengthen, then this could be detrimental to exporters, and could allow a trade balance deficit.
Thus, if the Rupiah exchange rate continues to strengthen, Bank Indonesia (BI) will issue certain policies to restrain the rate of strengthening of the Rupiah.
The Effect of Rupiah Exchange Rate on Stock Prices
The rupiah exchange rate in general has an effect on stock prices. However, you should not misinterpret that when the Rupiah exchange rate strengthens that day, your shares will rise. Nothing to do with it at all. So, if you are a stock trader, don't use daily Rupiah exchange rate information as a basis for making trading decisions.
The strengthening Rupiah exchange rate is able to have a positive impact on the JCI which will be felt in a certain period of time, as can be seen from economic policies, improving economic growth and improving the country's fundamentals. When the Rupiah exchange rate is stable, and government policies are able to stimulate the economy, the JCI will also rise.
One of the reasons why the JCI rose, one of which was supported by trade balance data. The trade balance surplus in general will lead to an increase in the JCI and vice versa. And the trade balance is surplus or deficit, one of which is also influenced by the Rupiah exchange rate.
