- 18 hours ago
Indonesia’s surprise rate hike puts the rupiah, investor confidence and regional currency stability in focus. The discussion with David Stepat, Country Director (Singapore), Dezan Shira & Associates will look at what the move signals for ASEAN, possible spillovers to Malaysia, and how growth, subsidies and fiscal discipline could shape market confidence.
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00:00All right, Indonesia's surprise interest rate hike has once again put the spotlight on the growing pressures facing regional economies.
00:08In an expected move, Bank Indonesia raised its benchmark rate by 25 basis points to 5.50% as it
00:17struggles to defend the rupiah,
00:18which has fallen sharply amid rising global uncertainty, higher oil prices, mounting subsidy costs and concerns over investors' confidence.
00:27The move raises a bigger question. Is this simply Indonesia's currency problem or could it be an early warning sign
00:34of broader economic pressures building across ASEAN, including Malaysia?
00:39Joining us to unpack the implication is David Stabat, Country Director, Singapore, De Zanshura and Associates.
00:46I want to say thank you very much, David, for joining us again.
00:49Firstly, taking a look at this matter, what does Indonesia's recent policy response, including rate adjustment,
00:55tell us about the level of pressure facing the regional currencies today?
01:02Thank you for having me, Nina.
01:05The first thing to understand is how unusual this move was.
01:09Bank Indonesia did not wait for its scheduled meeting next week.
01:13It hiked 25 basis points off cycle to 5.5% as you mentioned.
01:18And this is actually the first time it has done that in eight years.
01:22And this comes on top of a larger than expected 50 point hike just last month.
01:27Central banks only do that when they feel they are losing control of the narrative.
01:31And the trigger is clear.
01:33The rupiah hit a record low above 18,000 to the dollar this week.
01:38It is down around 8% this year.
01:41And Jakarta stock market has lost roughly a third of its value.
01:44And Indonesia has burned through about 12 billion U.S. dollars of reserves defending the currency.
01:50What this tells us is the region is under pressure from the war in the Middle East.
01:58Oil prices have increased to the 90s and at one point to 120.
02:03For energy importing economies with large fuel subsidies bills, that hits the budget.
02:09The trade balance and the currency all at once.
02:11Indonesia is the most exposed, so it's feeling it first and hardest.
02:16Malaysia is in a structurally better position.
02:18It is a net energy exporter.
02:22Inflation is below 2%.
02:23And Bank Negara has been able to sit comfortably at 2.75%.
02:29But Malaysia is not insulated.
02:31The ringgit went from being one of Asia's best performers to the region's worst this month.
02:37So the pressure is regional.
02:38The difference is how much buffer each country has.
02:43And looking at that situation, and if policy tightening is not enough to stabilize the rupiah,
02:48what underlying risks are investors really pricing in at this point?
02:54This is the crucial point.
02:57If the rupiah's problem were simple yield, the May hike of 50 basis points would have fixed it.
03:03But it did not.
03:05The currency kept falling to new record lows, even as Indonesia spent reserves and raised rates.
03:10When that happens, the market is telling you the worry is not the price of money.
03:15It is confidence in the policy framework.
03:17And this is driven by three things.
03:20First, the financial trajectory.
03:22Investors are looking at very ambitious spending plans in Jakarta and the fuel subsidy bill that balloons every time there's
03:29an oil crisis.
03:30And they are asking, how is all this getting funded?
03:34Then, institutional credibility.
03:35Parliament has just given the central bank a broader mandate.
03:39And here, investors are asking whether Bank Indonesia will stay fully independent or be drawn into financing government priorities.
03:47And lastly, policy predictability, including some of the commodity export rule changes that have unsettled foreign investors.
03:54So, rate hikes cannot fix any of these three problems.
03:59They buy time and they make shorting the rupiah more expensive, which is why we saw a relief bounce.
04:05But they also raise borrowing costs across an economy.
04:09And that is already slowing.
04:11So, the medicine has side effects.
04:13From an investor perspective, and this is what I see with my own client conversations, capital does not demand perfection,
04:19but it demands predictability.
04:21Once a market loses predictability, every individual policy tool becomes less effective, and you end up paying for credibility through
04:30the currency, which is the most expensive way to pay for it.
04:34And also, to what extent is the weakness in the rupiah driven by domestic fundamentals versus external factors such as
04:41U.S. dollar, strength, and Federal Reserve policy?
04:51So, that's also a really good question.
04:57For the Federal Reserve policy, the Trump administration hired a new head of the Federal Reserve who's much more conservative
05:11than initially fought.
05:14So, he also has a reputation for competence.
05:19So, we would see if this translates into rate hikes.
05:25I think the Trump administration in general would like to see lower interest rates, but it seems like the current
05:31environment does not support this.
05:34That is also the reality that we are seeing on ground, and we've seen signs of capital outflows across emerging
05:40markets.
05:41How critical is investors' confidence in determining whether the rupiah can stabilize?
05:46How critical is investors' confidence in the world at the price?
05:50Very good question.
05:55So, on trade, of course, it is very important.
06:04The subsidies are under pressure, and of course, Indonesia is showing us in real time what an alternative costs, right?
06:13Like I said, Brent is really expensive now, nearly 120.
06:18The Strait of Hormuz crisis is still effectively closing about 20% of global oil supply.
06:25And no finance ministry in the region budgeted for that, right?
06:30In Malaysia, Malaysia's own subsidy bill in April was about 10 times its pre-war level.
06:35So there is some fiscal slippage this year that's unavoidable.
06:40And the key distinction is that something I emphasize before in investors all the time, markets do not punish a
06:50deficit number.
06:51They punish the loss of a credible path.
06:54So Malaysia here is doing well.
06:56The deficit has come down from 5.5% of GDP to below 3% by 2028.
07:05And the subsidy mechanism is now targeted.
07:08So the government can flex it at oil.
07:10And that is what's protecting confidence.
07:15And this is a good practical move.
07:17But when you look at Indonesia, that's the other payoff.
07:20Investors doubt the fiscal trajectory.
07:23The country ends up paying through a falling currency, shrinking reserves, and emergency rate hikes that show growth.
07:30And that bill is always larger than the subsidy savings you deferred.
07:34So Malaysia has one structural advantage worth remembering.
07:38As a net energy exporter, higher oil prices also lift petroleum revenue.
07:42And that is a natural hedge.
07:44And Indonesia simply does not have that.
07:47And also, maybe share with us from a policy perspective,
07:50what key lessons can Malaysia take from Indonesia in balancing growth, subsidies,
07:56and current stability under the current global conditions?
08:03Excellent question.
08:04So I would watch five things.
08:07First, correlation.
08:08This is the single best test.
08:11When regional currencies move together, for example, the rupiah keeps sliding with the ringgit,
08:18the barth and the peso hold steady.
08:20Markets are treating this as a domestic Indonesian problem.
08:23But if they all weaken together, the region is being priced as a block.
08:27And that is a more serious scenario.
08:29Then oil and the Strait of Hormuz, the ceasefire is fragile.
08:34And the strait is still effectively blocked.
08:37If oil settles back into the 70s or low 80s, most of this pressure fades.
08:41But if it pushes back to 110, 120, every assumption gets worse for everyone.
08:48And then when you look at Indonesia's reserves, they are roughly $145 billion,
08:54the lowest in nearly two years.
08:56The monthly reserve data will tell us whether Bank Indonesia is winning or just buying time.
09:00And then, of course, the US.
09:02If the Federal Reserve turns hawkish because of oil-driven inflation,
09:06the dollar strengthens against everything.
09:09And that is a headwind no ASEAN central bank can offset alone.
09:13And lastly, closer to home, foreign holdings of Malaysian government bonds
09:17and the monthly fiscal updates.
09:19As long as foreign investors keep buying Malaysian debt
09:22and the consolidation path holds, Malaysia stays in the differentiated camp.
09:29So the base case for what it's worth,
09:33this is still primarily an Indonesian story driven by global energy trucks.
09:40But the margin for error across the region is thinner than it has been in years.
09:45And taking a look at the Indonesia story,
09:47how could also a weaker rupiah also spill over into Malaysia's economy,
09:51particularly in terms of trade competitiveness,
09:54cross-border investment, and even on the market sentiment, David?
10:01Yeah, excellent question.
10:03So on trade, Indonesia is one of Malaysia's largest trading partners in ASEAN.
10:07And the two economies compete head-to-head in several export markets,
10:12most obviously palm oil.
10:14Significantly weaker rupiah makes Indonesia's exports cheaper in dollar terms,
10:18which puts pricing pressure on Malaysian producers.
10:21At the same time, Indonesia purchasing power falls.
10:25So Malaysian companies selling into Indonesia's consumer market
10:30from food to automotive to services will feel softer demand.
10:35On investment, the corporate exposure is real.
10:38Several large Malaysian groups have substantial Indonesian operations,
10:42particularly in banking and telecoms.
10:44Their rupiah earnings are worth less when translated back into ringgit.
10:48And if Indonesian growth slows under higher interest rates,
10:53asset quality and consumer demand become something to watch.
10:58And the fastest channel is sentiment.
11:01Many global funds still treat ASEAN as a single allocation.
11:04When Jakarta sells off hard,
11:07some of that spills into Kuala Lumpur, Bangkok, Manila almost immediately.
11:11And we have seen that this month.
11:14There's a flip side.
11:15A crisis also forced differentiation.
11:18If Malaysia keeps demonstrating fiscal discipline
11:21and stable institutions while Indonesia struggles,
11:24some regional capital will rotate towards Malaysia
11:27as the relative safe harbor.
11:30And for Malaysian corporates with strong balance sheets,
11:32Indonesia and assets are now becoming cheaper
11:35for a long-term acquirer,
11:37that is an opportunity, not just a risk.
11:40All right.
11:40Thank you very much, David, for your insights.
11:43The pressure on the rupiah may be centered in Indonesia today,
11:46but the broader questions around investors' confidence,
11:49fiscal discipline and current stability resonate across the region.
11:53And as global uncertainty remains elevated,
11:56the challenge for ASEAN economies is not just sustaining growth,
11:59but doing so while preserving market trust and economic resilience.
12:03Thank you again, David, for joining us.
12:05And definitely also all of our discussion here
12:07will be featured in astroone.com
12:09and across all social media platforms.
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