By Reid K.
Over the last few months, the uncertainty over when the U.S. Federal Reserve will tighten rates has created downward pressure on the rupiah.
As part of its effort to spur a recovery from the 2007-2009 Financial Crisis, the U.S. Fed has kept rates at a near-zero level since December 2008.
But due to its sizable current account deficit, Indonesia, Southeast Asia's largest economy, has been one of the worst hit by outflows since the Fed first announced that it's tempted to raise rates soon.
So far this year, the rupiah has been emerging Asia's second-worst performing currency - it has lost more than 8% against the dollar. The currency is trading at its lowest levels since the 1997 Asian Financial Crisis.
According to Sofyan Djalil, Indonesia's coordinating minister for economics, once the U.S. Fed starts to tighten, the rupiah will not drop further as such developments have already been accounted for by the market.
Djalil believes the fundamentals of the Indonesian economy are sound and the current weakness of the rupiah is only a result of the markets having already priced in a 25-50 basis point increase in the Federal Reserve rate. "Our rupiah is undervalued," Djalil said.
"I wish the Fed will decide and the sooner is the better for Indonesia because the uncertainty gives … the financial market a good legitimacy to play around," Djalil said.
Senior Deputy Governor Mirza Adityaswara joined Djalil in his assessment. On Friday, he stated that Bank Indonesia expects capital inflows once the Fed decided to move finally.
Thus far, the central bank has not resorted to policy easing to support growth but it is believed it will be able to cut its key rate after a Fed rate hike.
Fed officials are still undecided on when to raise rates; however, most investors are expecting the first rate hike to come as soon as September. Data released on Friday pointed to an improving economy - U.S. non-farm payrolls increased by 215,000 in July.
Meanwhile, Djalil points to evidence that economic activity is already picking up - and an increase in container shipments out of Jakarta and steadier sales of motorbikes have been recorded. The government is still optimistic that economic growth will reach 5.0% to 5.2% for the full-year of 2015.