4.53 THE ECONOMY AND MONETARY POLICY

Monetary Policy Review - September 2010 15 Rupiah Exchange Rate The solid fundamentals of the economy and sustained high yields The solid fundamentals of the economy and sustained high yields The solid fundamentals of the economy and sustained high yields The solid fundamentals of the economy and sustained high yields The solid fundamentals of the economy and sustained high yields underpinned the attractiveness of investment in domestic instruments, underpinned the attractiveness of investment in domestic instruments, underpinned the attractiveness of investment in domestic instruments, underpinned the attractiveness of investment in domestic instruments, underpinned the attractiveness of investment in domestic instruments, which bolstered exchange rate during August 2010 which bolstered exchange rate during August 2010 which bolstered exchange rate during August 2010 which bolstered exchange rate during August 2010 which bolstered exchange rate during August 2010. During the month, the exchange rate averaged Rp 8,972 to the US dollar, representing an appreciation of 0.78 over July 2010. At end-August 2010, the rupiah closed at Rp 9,035 to the US dollar, having weakened 0.95 point to point from July 2010 Graph 2.14. Accordingly, the average value of the rupiah has advanced 13.4 to Rp 9,137 to the US dollar in 2010 from Rp 10,361 in 2009. The rupiah appreciation during August was accompanied by slightly increased volatility. The level of volatility in movement in the rupiah reached 0.28 in August 2010, up from 0.19 one month earlier Graph 2.15. The heightened volatility in the rupiah is explained in part by a renewed surge in capital inflows. Externally, the risk of slowdown in the global economic recovery has Externally, the risk of slowdown in the global economic recovery has Externally, the risk of slowdown in the global economic recovery has Externally, the risk of slowdown in the global economic recovery has Externally, the risk of slowdown in the global economic recovery has become a factor bringing capital inflows into the region become a factor bringing capital inflows into the region become a factor bringing capital inflows into the region become a factor bringing capital inflows into the region become a factor bringing capital inflows into the region. The weakening in various US economic indicators and high levels of unemployment have reinforced perceptions of road blocks to recovery in the US economy. In Europe, concerns escalated in the wake of the downgrading of Ireland»s credit rating, which then widened yield spreads for the PIIGS nations over German bonds. This is feared will create added difficulties for the PIIGS countries in bringing down their fiscal deficits. By contrast, Asian nations have taken the lead in economic improvement. This has also heightened the threat of inflation in the region, compelling some central banks in Asia to raise their policy rates. This has become a key factor attracting investors to place their funds in emerging market financial instruments. During August 2010, the majority of Asian currencies moved upward in relation to the US Dollar Graph 2.16. Domestically, the solid fundamentals of the domestic economy have led to Domestically, the solid fundamentals of the domestic economy have led to Domestically, the solid fundamentals of the domestic economy have led to Domestically, the solid fundamentals of the domestic economy have led to Domestically, the solid fundamentals of the domestic economy have led to improvement in investment risk indicators for Indonesia improvement in investment risk indicators for Indonesia improvement in investment risk indicators for Indonesia improvement in investment risk indicators for Indonesia improvement in investment risk indicators for Indonesia. By the end of August 2010, the EMBIG spread eased to the 307 bps range while yield spread on Indonesia Global Bonds over US T-Notes narrowed to 160 bps Graph 2.17. This reflects investor confidence in Indonesian debt instruments. The safeguarding of domestic risk perceptions has raised covered interest parity CIP, the interest rate spread after factoring in risk, to 4.6 August 2010 from 4.1 July 2010. At this level, the CIP is wider than for many other countries in Asia Graph 2.18. Graph 2.14. Average Rupiah Exchange Rate RpUSD 8500 9000 9500 10000 10500 11000 11500 12000 12500 Feb Apr Jun Okt Des Aug 2008 2009 2010 Daily Exchange Rate Monthly Average Quarterly Average Feb Apr Jun Okt Des Aug Feb Apr Jun Aug 9,110 9,007 9256 9224 10937 11317 10527 9973 9459 9254 Graph 2.15. Rupiah Exchange Rate Volatility 8900 9400 9900 10400 10900 11400 11900 12400 2 4 6 8 10 12 Daily Volatility Volatility Average Daily Exchange Rate RpUSD - rhs IDRUSD Feb Apr Jun Ags Oct Des Feb Apr Jun Ags Oct Des Feb Apr Jun Ags Graph 2.16. Asian Currencies Appreciation Depreciation, Average August 2010 compare to July 2010 2.31 -0.93 0.49 3.16 -0.95 0.53 1.32 -2.49 2.62 1.99 1.58 1.81 0.78 2.45 1.64 1.02 -3.00 -2.00 -1.00 0.00 1.00 2.00 3.00 4.00 JPY KRW SGD THB IDR PHP MYR EUR Average Point-to-point