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fter declining for three consecutive months, the central bank's foreign exchange (forex) reserves strengthened to US$107.2 billion by the end of April, thanks to foreign fund inflows stemming from the government's successful dollar bond sales during the month.

Stronger forex reserves will build positive sentiment for the rupiah in the short-run, economists say. Throughout the first quarter this year, the market has been concerned by depleting forex reserves, which touched a two-year low of $104.8 billion in March, as Bank Indonesia (BI) actively intervened in the market to stabilize the currency.

'Our forex reserves increased mainly because of the issuance of global bonds last month,' BI Deputy Governor Hartadi A. Sarwono told reporters in Jakarta on Wednesday. In April, the Finance Ministry successfully reaped $3 billion from selling dollar-denominated bonds maturing in 10 and 30 years to foreign investors.

As BI's forex reserves were cumulatively depleted by $5.6 billion in the first quarter this year, Hartadi acknowledged the challenges faced by the central bank in defending the rupiah during the period.

He explained that prevailing global uncertainties had triggered fund outflows, consequently exerting pressure on Indonesia's capital account.

In the fourth quarter last year, BI saw a huge surplus in its capital account that was sufficient to offset the deficit in its current account, leading to an overall surplus in the balance of payments.

However, in the first quarter this year, BI's balance of payments was likely to be in deficit, Hartadi said, citing a weak capital account during the period.

Nevertheless, economists believe that there will be an improvement in Indonesia's capital account in the upcoming months ' a situation that would draw more foreign funds into the country and ultimately
strengthen the rupiah.

In the near-term, the rupiah would get support not only from stronger forex reserves, but also from portfolio inflows due to the quantitative easing policy pursued by developed countries, notably Japan, said Prakriti Sofat, an economist with UK-based Barclays Bank.

'However, over the medium-term, our view remains that the external position is vulnerable, as reserve depletion and currency pressures are likely to continue,' she said in an email interview on Wednesday.

Sofat said that political uncertainty ahead of the 2014 elections 'would likely weigh on portfolio and FDI [foreign direct investment] inflows' needed to support the capital account and the currency. This would cause the rupiah to breach the psychological threshold of 10,000 per dollar by the end of this year, she predicted.

Observers have warned that Indonesia will face notable challenges in attracting more foreign funds after international ratings agency Standard & Poor's (S&P) downgraded the country's sovereign debt paper rating to BB+ stable from BB+ positive, one notch below investment grade.

At the same time, S&P upgraded the credit rating of the Philippines to investment grade, triggering further intense competition among the two archipelagic countries in their bid to lure foreign investment.

Meanwhile, other economists shared similar views that the strengthening of forex reserves might only be temporary, warning government officials to quickly fix structural problems in Indonesia's economy.

'The $3 billion bonds issuance is a one-off and reserves will likely start sliding again this month,' Bank of America Merrill Lynch economist Hak Bin Chua told The Jakarta Post.

To avoid BI's forex reserves from depleting further, the government must move quickly to adjust fuel prices, he said. Soaring fuel subsidies have led to burgeoning oil imports and have caused a heavy deterioration in Indonesia's oil-trade balance, putting pressure on the rupiah.

Further delays in cutting fuel subsidies might eventually undermine investor confidence in Indonesia's economic fundamentals, according to Chua. 'A persistent oil-trade deficit and current account deficit will continue to weigh on the rupiah and drain forex reserves,' he said.