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Forex reserves safe despite
heavy outflow, claims BI

Bank Indonesia (BI) has given assurances that its foreign exchange (forex) reserves are still adequate, despite the outflow of foreign funds from debt and equity markets during the past several days.

“Our foreign currency reserves are still sufficient to back imports and to maintain the stability of the rupiah because they are still well above international standards,” BI director of communications Peter Jacobs said in a statement on Friday.

BI will have to meet extra dollar demand within the next two months, when the demand is traditionally higher due to company earnings repatriation and foreign debt payments.

The central bank’s forex reserves stood at US$105.1 billion at the end of May. BI’s forex reserves have cumulatively depleted by a staggering $7.7 billion since the beginning of this year, the fastest decline compared to other central banks in Asia, as BI had to intervene heavily in the market to support the weak rupiah.

BI also stated it would not cap its forex reserves position at a certain level, such as maintaining it above $100 billion.

“If someday [forex reserves] fall below $100 billion, that’s not something that we should be worried about, it’s reasonable,” BI director for monetary policy Juda Agung said on Friday.

Economists have predicted a steep decline in BI’s forex reserves by the end of June due to the huge capital reversal that took place during the month, as foreign investors removed their funds from emerging countries due to concerns over tighter global liquidity ahead.

Over the last three weeks, overseas fund managers have removed at least Rp 40 trillion ($4.3 billion), estimated at Rp 20.35 trillion in the bonds market and Rp 20.1 trillion from the stocks market, official figures show.

If BI’s forex reserves fell below $100 billion then the situation might compound the pressure on the rupiah, according to Hak Bin Chua, the ASEAN economist with Bank of America Merrill Lynch.

“Markets may start getting nervous about the adequacy of reserves to cover imports and capital flows,” he told The Jakarta Post on Friday, adding that Indonesia’s reserves-to-import cover ratio, which stood at 6.7 in April, was among the lowest in Asia, even below India’s at 7.1.

BI’s latest statements suggested that its foreign reserves “may be close to, or have breached, the $100 billion threshold,” said Chua.

The rupiah has reversed its weakening recently, strengthening by 0.3 percent this week to close at 9,929 per dollar on Friday, according to the Jakarta Interbank Spot Dollar Rate.

Analysts say the upward trend was attributed to positive market sentiment over the government’s successful attempt to hike fuel prices, as well as the possibility that the US Federal Reserve will change its stance and extend its monetary stimulus, which is otherwise known as quantitative easing.

Going forward, pressure on the rupiah might subside if the sell off in the region was to end, with foreign portfolio flowing back in abundance, said Gundy Cahyadi, an economist with the Singapore-based OCBC Bank.

“Indonesia’s situation is actually not as bad as some other countries in the region. In terms of market performance in the past month, for example, the stock market is still above the likes of the Thailand and the Philippines bourse,” he said.

“To some extent, we feel that part of the concerns regarding Indonesia’s foreign exchange reserves are a little overstretched,” he added.

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