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Goldman Sachs On IDR

IDR
  • IDR has staged a notable rally over the past two weeks. While IDR carry is not elevated versus the Dollar, it is moderately higher than for most other currencies in EM Asia, and part of the Rupiah’s recent rally may reflect a general increase in interest around carry in FX markets. Several domestic factors have likely played important roles as well: first, policymakers in Indonesia recently announced plans to modify export conversion rules to boost the supply of foreign currency onshore to support the IDR. In particular, the government plans to add manufacturing to the list of industries that must temporarily keep foreign exchange proceeds onshore (the current rule only covers mining, plantations, forestry and fisheries). These rules have not been finalized yet. In our view, given that around 93.5% of export proceeds (between January and July 2022) are already being repatriated, we do not think these rule changes will materially increase FX inflows. Nevertheless, regulation changes on export conversion rules indicate the authorities’ intent to boost USD liquidity onshore, which has been positive for the IDR.
  • Second, foreign bond flows have been steadily improving (USD 2bn this year) after the sustained outflows from February to November 2022. Overall, we think EM Asia local currency fixed income should see inflows once again in 2023. These factors support our bullish view on the IDR. Looking forward, we expect the current account in Indonesia to be broadly balanced in 2023 (vs. 2-3% deficit vs. GDP pre-Covid) and the broad balance of payment should be positive, supported by FDI and portfolio flows. We are also constructive on Indonesian bonds as BI has signaled a potential end to its hiking cycle, and foreign positioning is still very low at around 15% of outstanding from 40% pre-Covid.
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