The Indonesian rupiah could decline further as economic activity remains weak alongside slowing exports and factory activity. The top currency conversion with the Indonesian rupiah is the Australian dollar, which has been gaining against the rupiah for the last decade, seen below.
Data provided by Trading View
Factory activity in Indonesia remains weak. In April, the manufacturing PMI figure came in at 46.7, up from the previous month's reading of 46.4, while missing estimates for 50.4. A reading below 50 signals contraction. After peaking at 53 in the summer of 2014, manufacturing activity has trended significantly lower, seen below. The largest negative weights on factory activity were both exports and domestic demand.
"Indonesia's manufacturing sector continued to contract in April 2015, the seventh consecutive month of declining manufacturing activity in Southeast Asia's largest economy.
Pollyanna De Lima, economist for the HSBC Markit survey, stated that Indonesia's April contraction signals the ongoing fragility of the Indonesian manufacturing sector as both domestic and export markets form sources of weakness." According to Indonesia Investments.
Moreover, exports have accelerated in its pace of decline in recent months. In March, the export figure came in at an annual pace of -5.56% contraction, below the previous month's reading of -4.65%. After peaking in 2011 at 35% annual growth, exports have fallen significantly lower. Falling commodity prices have weighed heavily on export revenue in recent months.
"Exports of Indonesia's commodities are falling due to slowing demand in China, the country's main export market. Indonesia exports palm oil, rubber, crude petroleum, coal, tin, and other resources.
The government is trying to expand manufacturing but that industry is yet to pick up the slack. The weak rupiah hasn't helped exporters because the country relies on imported materials, which have risen in price, to produce much of its exports.
Exports in March fell from a year earlier, with oil and gas dropping 25 percent," according to the Jakarta Globe.
Data provided by the OECD
Finally economic activity has weakened as export and factory activity slowed. In the fourth quarter, the economic growth figure came in at 5.01%, up from the previous quarter's revised reading of 4.92%, while also exceeding estimates for 4.95%. After peaking at nearly 7% annual growth in 2010, economic activity has fallen sharply lower. Exports, government spending, and investment all helped to weaken the growth reading.
"Considering 2010 as the new base year, exports fell 4.53 percent yoy in the last three months of 2014, following a 0.7 percent decline in the third quarter, while imports rose 3.22 percent, rebounding from a 3.63 percent fall in the July to September period.
Government spending expanded 2.83 percent after registering a 4.37 percent decline in the previous three months. Private consumption grew 5.01 percent, slowing from a 5.44 percent growth in the preceding period," according to Trading Economics.
Policymakers may need to act in coming months as Indonesia's economy remains weak. Factory activity and exports have fallen alongside lower commodity prices. This has weighed on overall economic activity measures. The Indonesian currency could fall further against its trading peers as slower economic activity combines with policy easing.
