Liquidity clog may ease
in 6 months: BI

Bank Indonesia Governor Boediono sees a relief in the global liquidity squeeze within the next six months as terrified investors will eventually resurface after seeking shelter in safe-haven instruments.

Indonesia is seeking a larger chunk of a currency swap agreement with Japan, more than US$6 billion, to help ward off the rupiah’s decline and strengthen the already diminishing foreign currency reserves.

“We think the critical period will be around six months, with the main problems of tight liquidity and investors retrieving their money to return home,” Boediono said.

“There won’t be any countries or financial institutions that can withstand such a financial squeeze for more than six months. They will seek outlets for getting returns, and this will eventually push liquidity back to near-normal levels.”

Global investors are generally hoarding cash and gold as safe-haven instruments, while the financial sector struggles to fix the damage originally stemming from a bad loan blowup in the US housing sector.

Should their money flow again to seek proceeds, Indonesia will have a smoother flow of dollar supply and an ease in the choke on rupiah financing.

Like many other countries, Southeast Asia’s largest economy has been hit by a dollar shortage at banks, a rupiah liquidity squeeze resulting from a high degree of distrust between banks, and dropping demand for loans by companies.

In a bid to pool ammunition to safeguard the rupiah against greater future financial threat, Boediono said that aside from the Japan swap deal, BI had prepared other lines of defense to boost the supply of foreign currency reserves.

This includes bilateral standby loans with several countries, government loans, and planned swap pacts with Australia, the Asian Development Bank and the World Bank.

BI’s currency reserves plunged to $50.9 billion at the end of January, from $60.6 billion in July, as the central bank sought to ease the decline in the rupiah.

Currently, Indonesia has a swap pact with Japan, China and South Korea, worth a combined $12 billion, under the Chiang Mai Initiative that was inked alongside with the nine other members of ASEAN.

“This will not be read by investors negatively; this is a sign that we have the necessary second line of defense,” Boediono said, adding he had asked senior deputy governor Miranda Goeltom to tap more overseas  reserves.

Jitters that the rupiah’s decline could possibly lead to a drying up of the country’s reserves have kept the country’s currency default swap (CDS) at a fairly high level compared to neighboring countries.

The CDS is a credit derivative contract in which the buyer makes an installment to the seller and in return receives protection from default. The higher the CDS level, the riskier the deal.

“Our CDS stands at around 550, while for the Philippines it is 300. This has somewhat lessened investor appetite for our assets,” said BI deputy governor Budi Mulia.

He added the higher CDS was also triggered by a sluggish inflow of foreign exchange into the country.

“The Philippines has been helped by the huge amount of worker remittance, more than triple our $5.3 billion last year,” he said.

Boediono also said a recovery in the country’s real sector would take longer, until 2010 depending on the demand scale in the United States and Japan.

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