Exchange Rate Depreciation in Indonesia: Trade Competitiveness, Corporate Vulnerability, and the Role of the Dominant Currency Paradigm
DOI:
https://doi.org/10.47747/fmiic.v1i3.3559Abstract
Exchange rate fluctuations significantly impact the economic performance of emerging economies, particularly those heavily reliant on international trade. This study examines the influence of exchange rate movements on Indonesia’s exports, imports, and investment through three transmission mechanisms: the trade channel, the balance sheet channel, and the Dominant Currency Paradigm (DCP). The analysis employs a combination of AutoRegressive Distributed Lag (ARDL), Nonlinear AutoRegressive Distributed Lag (NARDL), panel data regression, and sectoral estimation approaches utilizing quarterly macroeconomic data and firm-level financial data.The results from the trade channel analysis indicate that exchange rate depreciation positively contributes to export performance while reducing import demand in the long term. The nonlinear estimation further reveals significant asymmetry, demonstrating that depreciation exerts a stronger influence on trade flows than appreciation. A 1% depreciation of the real exchange rate is estimated to increase exports by approximately 0.85% and reduce imports by around 0.65%, resulting in an improvement in net exports. The balance sheet analysis demonstrates that exchange rate depreciation can adversely affect corporate investment by increasing the burden of foreign currency-denominated liabilities. However, the magnitude of this effect varies depending on firms’ exposure to foreign currency debt. The sectoral analysis confirms substantial heterogeneity across industries, where sectors with higher foreign currency liabilities experience larger investment contractions following depreciation, while sectors with lower exposure tend to benefit from improved competitiveness. Furthermore, the findings support the relevance of the Dominant Currency Paradigm, indicating that movements in the US dollar exchange rate play a more influential role in determining Indonesia’s export performance than bilateral exchange rates with individual trading partners. the study concludes that exchange rate depreciation enhances Indonesia’s external competitiveness and trade balance, albeit potentially creating financial vulnerabilities through the balance sheet channel. These findings underscore the significance of maintaining exchange rate stability, fortifying foreign currency risk management, and implementing policies that bolster both export competitiveness and corporate resilience to external shocks.
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