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Indonesia's rupiah falls to its weakest level in more than 20 years

Indonesia's rupiah falls to its weakest level in more than 20 years Adek Berry | AFP | Getty Images ...

Indonesia's rupiah falls to its weakest level in more than 20 years

Adek Berry | AFP | Getty Images

The Indonesian rupiah fell to its weakest level against the dollar in more than 20 years on Monday, prompting the country's central bank to say that it will intervene.

BankIndonesia said on Monday it is intervening in the foreign exchange and bond markets, according to a Reuters report.

The rupiah fell to 14,777 per dollar on Monday, its weakest level since 1998 and a 8.93 percent drop since the start of the year.

This year, the rupiah has be en among the worst performing currencies in the region, which analysts have attributed to its current account deficit and mayhem in emerging markets caused by the Turkish lira crisis.

"The high foreign-ownership on bonds coupled with Indonesian corporates' increased USD debt are also rendering (the Indonesian rupiah) prone to more weakness," Vishnu Varathan, head of economics and strategy at Mizuho Bank, told CNBC in an email.

The country, the largest economy in Southeast Asia, has around 41 percent of government debt denominated in foreign currencies, according to Moody's. If the rupiah depreciates further, then those debts would be more expensive to repay.

Varathan warned: "If credit spreads rise further on (emerging market) risks and oil remains elevated ahe ad of Iran sanctions (set to bite in November), the risks of breaching 15,000 is a clear and present danger." When oil prices go up, it contributes to an increase in the country's import bill.

But the intervention attempt may not be effective, according to DBS economist Radhika Rao.

"Authorities have actively supported the (foreign exchange) and bond markets, during recent bouts of volatility. In midst of a broader slide in regional currencies, intervention attempts help to smoothen the downdraft but it will be a challenge to reverse the direction," Rao told CNBC.

The central bank has recently pulled several moves to support its currency, such as raising its interest rate four times since May, with the last in August, and has been tapping its foreign cash reserves t o buy up the rupiah.

With its foreign reserves dwindling, the government has also imposed import curbs as it will contain its current account deficit, which measures the flow of goods, services and investments into and out of the country. Fewer imports also reduce the need to sell rupiah to buy more foreign currencies to meet its needs.

Tuan Huynh, Deutsche Bank Wealth Management's chief investment officer for Asia Pacific, wrote in a recent report that Indonesia's current account deficit "makes it prone to a funding crisis." He noted that its deficit widened to $2 billion in July, the largest monthly deficit since July 2013.

Indonesia's monetary policy for the rest of this year will mainly be driven by volatility and the value of the rupiah, Huynh added.

"The key triggers for any further rate hike would be a further strengthening of the USD or the widening of the current account deficit caused by strong domestic demand."

But DBS analysts wrote in a note last week that they foresee more rate hikes.

"For now, markets see Indonesia working hard to maintain macroeconomic stability e.g. hiking rates more to fend off exchange rate volatility and keeping to fiscal consolidation," they said.

รข€" Reuters and CNBC's Yen Nee Lee contributed reporting to this story.

Source: Google News Indonesia | Netizen 24 Indonesia

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