SINGAPORE -- Indonesia has made it mandatory to use the rupiah for all domestic transactions.
The regulation, which took effect Wednesday, is seen as an attempt to shore up the currency's value. Many market watchers, however, reckon the rupiah will continue to decline as Indonesian exports falter and a U.S. interest rate hike looms.
Bank Indonesia, the country's central bank, instituted the rule, allowing for some exceptions. Violators could face huge fines. Many companies are likely to be affected, particularly those that import products in dollars. Some businesses hedge currency risk by conducting domestic transactions in dollars as well.
Experts say some importers may raise prices in anticipation of further rupiah depreciation.
The rupiah tends to face selling pressure because of the country's persistent current-account deficit. A weak home currency, coupled with high inflation, has made it difficult for the central bank to ease its monetary policy.
Will ordering businesses to use the rupiah help? Outflows of investment money are expected to exceed demand for the rupiah associated with the new rule. In fact, the rupiah weakened against the dollar in June, despite expectations that it would become the only option for domestic settlements.
The currency was around 13,300 to the dollar Wednesday, its lowest level since August 1998.
Wai Ho Leong, a senior economist at Barclays in Singapore, said it is hard to predict the effects of mandatory rupiah usage. He projected a decline in the currency's value to 13,950 to the dollar by the end of the year, citing U.S. rate hike speculation, sluggish exports and weak domestic consumption.
Some observers expect the rupiah to slump to 14,000 to the greenback as early as September.
The Indonesian coal industry is against the rule, according to media reports. Sector players fear it will hinder President Joko Widodo's measures to attract foreign investment.