Bank Indonesia reinforces forex reserves defence

BI is trying to halt the rapid draining of its forex reserves by aggressively absorbing dollars from its monetary instruments. At the same time, the central bank has also stepped back from interventionist moves for the rupiah to give room for the currency to float at its market-determined rate.

The result of the strategy has been a surprising increase of its forex reserves, which have strengthened for two consecutive months to touch US$95.7 billion (Bt2.976 trillion) by the end of last month, rising by a cumulative $3 billion since July.

“In recent weeks, BI seems to be more tolerant of where the rupiah is trading,” said Gundy Cahyadi, an economist with the Singapore-based DBS Bank. 

“I think BI realises that it is futile to intervene so aggressively, like it did in June.”

However, the latest improvement has not changed the fact that the BI’s forex reserves are still the fastest-depleting among central banks in Asia, declining to $17 billion (or by 15 per cent) this year.

Since January, BI has had to dig deep into its forex reserves to support the rupiah, which has been under heavy strain from Indonesia’s wide current account deficit and capital outflows that created a huge shortfall of dollar supply-demand in the market.

For some policymakers, the fast depletion of forex reserves might echo the painful experience during the 1997-1998 Southeast Asian economic crisis.

The financial calamity at that time was triggered by the exchange rate overshooting, after the rupiah became the subject of speculative attacks as BI ran out of forex reserves to support the pegged currency.

The central bank apparently now wants to ensure that history will not repeat itself, strengthening its line of defence by extending two bilateral forex swap lines with Japan and China worth additional forex reserves of $12 billion and $15 billion, respectively.

BI also established new swap agreements with South Korea equivalent to $10 billion, as well as joining forces with Asean countries in regional swap agreements worth $2 billion.

The swap lines give BI access to a total $40 billion of additional forex reserves that the central bank can utilise any time if it bumps into a liquidity shortage. 

This should cushion the economy even in a worst-case scenario, which Finance Minister Chatib Basri pinpoints as a $30-billion current account deficit and $10-billion capital account deficit.

BI “does not want to underestimate the risks” that Indonesia’s economy could come across, given the uncertain outlook in the global economy, central bank spokesperson Difi Johansyah said when asked about the swap line agreements.

“If the US really proceeds in tapering its quantitative easing, we can’t know ahead how severe its impact will be on our economy,” he said.