(Bloomberg) -- Indonesia has just raised the stakes for rupiah traders.
The currency may slide as far as 20,000 per dollar if the worst materializes and the economy contracts under the weight of the virus pandemic, according to Finance Minister Sri Mulyani Indrawati. That level is more than 15% weaker than the all-time low of 16,950 reached during the Asian financial crisis.
Whether the government is simply preparing markets for the worst or signaling that it's preparing to scale down intervention, the prospect of a sharp fall has opened up the possibility of the currency reaching a level that was previously unthinkable.
The Finance Ministry's line in the sand could invite speculators targeting further weakness in the rupiah while others line up bets that the level will never will be reached. Options traders are pricing in a one-in-three chance that the rupiah will drop to 20,000 by year-end.
“While it remains vulnerable on the external debt front, Bank Indonesia is still in a good position to lean against IDR weakness,” said Chang Wei Liang, a macro strategist at DBS Bank Ltd. in Singapore. “Indonesia's import coverage ratio is comfortable. Its reserves to gross external financing ratio has also improved compared to the 2013 taper tantrum period.”
The rupiah may fall to as low as 17,500 this year and 20,000 in the worst-case scenario, Indrawati said Wednesday, adding that the authorities will prevent the currency from sliding to 20,000.
Bank Indonesia sees the current exchange level as appropriate and is committed to ensuring the rupiah's stability, Governor Perry Warjiyo said. The finance ministry's 17,500-20,000 rupiah range estimate is for the purpose of pre-emptive action, he added.
After Indrawati's comments, the currency tumbled to the day's low of 16,458. It crashed to 16,625 last week, the weakest since June 1998.
The rupiah's decline may accelerate in the coming days if policy makers step back from supporting the currency to preserve their holdings of the dollar.
“Policy makers are taking a realistic approach,” said Mitul Kotecha, senior emerging markets strategist at TD Securities in Singapore. “They do not want to expend all their ammunition and as with most central banks in Asia, have learned that it cannot be sustained against significant external pressures.”
Foreign-exchange reserves data for March due next week may highlight the extent of the authorities' intervention. Holdings stood at $130.4 billion in February, near the record high of $132 billion reached in January 2018 and 20% above the level deemed as appropriate by the International Monetary Fund.
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