Bank Indonesia prepares monetary measures ahead of Greek election

Indonesia and other Southeast Asian countries are preparing strategies to protect their economies ahead of a Greek election that is predicted to worsen economic turmoil in Europe and affect global growth.

Bank Indonesia (BI) Governor, Darmin Nasution, revealed on Friday that the central bank would inject foreign exchange (forex) into the market depending on needs, in a bid to maintain the stability of the rupiah.

In addition, BI would also continue with its existing stabilization policies, such as the purchase of government bonds in the secondary market, the issuance of US dollar term deposits and the development of other forex transaction instruments.

“BI can see that the direct impact of the European crisis upon Indonesia’s corporate and banking sector has so far been relatively limited,” Darmin said in a statement.

According to BI’s data, as of April, Indonesia’s private borrowings from Europe were US$21.6 billion, of which most of the funds came from the Netherlands (57.3 percent), the UK (10.7 percent), Germany (6.4 percent) and France (2.5 percent). The data also shows that the debt exposure to Portugal, Ireland, Italy, Greece and Spain (PIIGS) was very small.

The impact of the crisis in Europe has been represented through pressure on the foreign exchange and financial markets, the intensity which has grown stronger since early May, as seen from the weakening currencies and composite indexes in Asia, including Indonesia.

Darmin reported that BI had, therefore, increased the supply of forex liquidity to stabilize the rupiah’s value, and bought government bonds from the secondary market. The country’s foreign reserves as of May 31 reached $111.5 billion, sufficient for 6.2 months of imports and paying off the government’s foreign debts.

“So far, the forex and rupiah liquidities are secure,” he emphasized. BI has also started to offer the term deposits, and prepared other instruments, to protect the country’s economy.

The bank is also strengthening its coordination with the government, including the signing, on June 7, a memorandum of understanding (MoU), in an attempt to protect and maintain the stability of Indonesia’s financial system. The MoU clarifies the mechanism and action plans of each institution and how to coordinate necessary steps between them.

Bloomberg reported that other Asian countries were also preparing measures to minimize unwanted impacts from the European crisis.

Vietnam intends to accelerate state spending and boost bank lending to bolster the economy, Deputy Prime Minister Nguyen Xuan Phuc told the National Assembly in Hanoi on Friday. Malaysia’s government asked parliament yesterday to boost its annual budget by 13.4 billion ringgit ($4.2 billion), while Indonesia said Wednesday it would implement stimulus measures to spur domestic consumption and infrastructure spending.

The region’s governments are signaling their readiness to support their economies after the central banks in Indonesia, the Philippines and Thailand held fire on interest-rate cuts this week before the June 17 vote in Greece. While cutting Asia’s already low borrowing costs would risk asset bubbles, China, Hong Kong, Indonesia, the Philippines, Singapore and South Korea were in the strongest position to boost fiscal spending if needed, HSBC Holdings Plc. said in a note on Friday.

“All countries in Asia are saving ammunition if contagion spills over from Europe into the US and onto international financial markets,” said Wai Ho Leong, a Singapore-based senior regional economist at Barclays Plc. “That’s when all the countries in Asia will quite aggressively stimulate [their economies] through fiscal spending. They are all prepared.”

The benchmark stock indexes in Malaysia and Vietnam rose today. The Ho Chi Minh City Stock Exchange’s VN Index gained 1.8 percent, its first increase in a week. The FTSE Bursa Malaysia KLCI Index rose 0.3 percent as of 4:13 p.m. on Friday in Kuala Lumpur.