Selling spree may dry up forex reserves

The rupiah’s selling pressures and volatility, which might last until the eurozone debt crisis is resolved, could cause serious problems in the country’s foreign exchange reserves, analysts said.

The currency again saw heavy selling pressures on Thursday when it touched a 17-month low of Rp 9,230 per US dollar, falling 2.1 percent on increased demands for US dollars amid an uncertain global economy that prompted foreign funds to reduce holdings of Indonesian assets.

The rupiah, however, rebounded to Rp 8,993 afterward at 4 p.m. — a 0.5 percent increase — according to local bank prices compiled by Bloomberg. Analysts attributed the sharp increase within the day’s trading to Bank Indonesia’s (BI) intervention.

Rupiah sell-offs and US dollar purchases might reduce the forex’s liquidity in the domestic market, spiking costs for public and private institutions to borrow and expand in forex, Standard Chartered Bank Indonesia’s senior economist Fauzi Ichsan said.

“What we are seeing now is a liquidity crisis,” he added. “For forex-funded investment and loans, dry liquidity could make investment and capital expenditure plans more expensive, hindering investment.”

According to Fauzi, a slowdown in investment would pose a greater threat than a slowdown in exports — which might happen due to slowing global demand, as has been foreseen as the global economy is expected to slowdown — given that the share of investment in the nation’s GDP is bigger than net exports.

A persistent decline in the rupiah could result, among other things, in more expensive imports and higher overseas borrowing costs for both the government and companies.

“Overall, markets, including currencies, are dropping. But Asia, including Indonesia, is among the worst, because we’ve been having a better performance,” said Bank Mandiri chief economist Destry Damayanti

International funds have been reducing holdings of Indonesian assets, putting pressure on the rupiah, “given the high foreign holdings” on Indonesia’s stock and bond markets, she added.

Overseas investors, holding about 60 percent of publicly traded stocks at the Indonesia Stock Exchange (IDX), sold $51 million more Indonesian shares than they bought in the first three days of this week,
according to exchange data.

No data has been released to indicate the forex liquidity conditions in the nation’s banks, but Destry said it’s not “fearsome” like it was in the 2008/2009 and 1997/1998 crises.

“The market is still segmented. Overall, [forex] liquidity is sufficient, but it could be different case by case,” Destry said.

BI deputy governor Hartadi Sarwono has said that the central bank remained vigilant on the nation’s overall liquidity conditions, opening possibilities of loosening banks’ minimum forex requirements stored at the central bank.

BI has spent billions of dollars from its forex reserves, which slid to $113.96 billion from $124.64 billion in August, to buy rupiah and provide dollar liquidity in the market to ease volatility in the nation’s currency.

“[Currencies] depend on the psychology of the market right now, and some of that psychology is not based on economic fundamentals,” said Jon D. Lindborg, country director for Asian Development Bank (ADB) Indonesia resident mission, citing Indonesia’s low public-debt level of 25 percent, resilient 6.5 percent economic growth and large forex reserves this year.

“There’s been movement in the rupiah, but it’s more related to the fact of what has been happening in the eurozone and end of the year need for foreign currency here.”