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Indonesia Rupiah Surges; Good for Retailers, Bad for Exporters

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A strengthening rupiah is expected to boost retail in Indonesia, but could also undercut the country’s central export business.

As a consequence of a dramatic increase in Indonesia’s foreign exchange reserves, the rupiah has surged, rising 6.5% this year against the U.S. dollar, a reversal of last year’s 26 percent drop as a consequence of a growing current-account deficit. On March 7, Bank Indonesia announced that foreign reserves increased to $102.74 billion in February, up from $100.65 billion in January.

A report issued by Trimegah Securities, an Indonesian brokerage firm, noted the rupiah’s upward movement. “The rupiah continues to strengthen, [trading] below the 11,500 level.” The same report discussed the boon a stronger rupiah would likely have on otherwise struggling retailers in Indonesia.

Purbaya Yudhi Sadewa, the director at Danareska Research Institute in Jakarta, said the rupiah will likely continue to improve, positively affecting domestic consumption. “It seems that without intervention by Bank Indonesia, the rupiah may be even stronger. The economic prospects are good, I think there is little possibility of the rupiah retracting its gain. Foreign investors like our improving economic prospects.”

Many of Indonesia’s retailers have underperformed lately, especially in the wake of massive protests against what many workers believe is an inadequate minimum wage. For example, the poultry producer Japfa reported a 17 percent decline in net income for the first nine months of 2013, a sluggish performance by its normally brisk standards. And while the consumer confidence index fell in February, most experts predict it will significantly rebound soon.

Indonesia is considered by many to be a rocketing star among apparel exporters, but its domestic economy still struggles by comparison, stymied by limited opportunity and low wages. While its massive supply of low-cost labor has been a point of attraction for Western retailers, low wages have ignited civil unrest, with workers taking to the streets in huge numbers protesting their alleged exploitation. Only one year ago, twelve province governors were compelled to increase minimum wages by an average of 19 percent, in response to persistent strikes that were stymieing business. In 2012, there was a similar adjustment of the salary structure, raising the minimum wage by as much as 40 percent, depending upon the province in question. This pegs the minimum wage somewhere between $80 and $160 dollars per month in Indonesia, compared to $75 in Cambodia.

Low wages draw in foreign investment but also dampens the domestic consumers buying power. A rallying rupiah will almost certainly stimulate domestic retail sales, but it will also undercut Indonesia’s export business’ competitiveness. Indonesia also faces stiff competition from China and rival ASEAN nations, and has found China’s fiber, textiles and garment exports particularly difficult to counter, especially after the passage of CAFTA. These disadvantages have only been exacerbated by inadequate sovereign marketing. According to the Global Business Guide of Indonesia: “Branding and marketing of Indonesian made textiles has been conducted poorly in the past and domestic brands have not taken a strong footing among Indonesian consumers. Foreign apparel brands have flourished in the upper end of the market as have the imports of cheap garments from China that are on trend. With a reorientation of the sector towards higher quality goods and greater focus being placed on innovation and creativity; Indonesia has a strong base for further developing its textile garment, textile and fibre industries.”

Especially given the increasing costs of manufacturing in China, many countries have been investigating moving more of their manufacturing to the Southeast Asian nation, with particular focus on the Central Java area of the country. Central Java has proven especially attractive for a variety of reasons: a regulatory environment congenial to business, a well-developed infrastructure which includes accessible highways, recently modernized airports, and a seaport convenient for trans-oceanic shipping.

Also, much of Indonesia’s textile and garment labor force is concentrated in Central Java. Jakarta and Batam Island also boast dense hamlets of factories. And as an added bonus, Batam Island is merely 20 kilometers away from Singapore, renowned for its tariff-free and low tax environment.

The E.U., U.S. and Japan already import a considerable amount of Indonesian products each year, especially apparel. More than 36 percent of all ready-made garments produced by Indonesia are destined for U.S. shores, with another 16 percent headed to the E.U. and 5 percent for Japan. The total value of Indonesia’s exports to the U.S. reached nearly $12.5 billion in 2012.

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