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BI reinforces foreign exchange reserves defense
Bank Indonesia (BI) is attempting to shore up market confidence over the sufficiency of its foreign exchange (forex) reserves, doing everything from toning down its rupiah intervention to signing swap lines with its Asian central bank counterparts
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Bank Indonesia (BI) is attempting to shore up market confidence over the sufficiency of its foreign exchange (forex) reserves, doing everything from toning down its rupiah intervention to signing swap lines with its Asian central bank counterparts.
BI is now trying to halt the quick depletion of its forex reserves by aggressively absorbing dollars from its monetary instruments. At the same time, the central bank also stepped back from performing too much intervention for the rupiah and gave room for the currency to float at its market-determined rate.
The result of such a strategy was a surprising increase of its forex reserves, which had strengthened for two consecutive months to touch US$95.7 billion by the end of last month, rising by a cumulative $3 billion since July.
'In recent weeks, BI seems to be more tolerant of where the rupiah is trading,' said Gundy Cahyadi, an economist with the Singapore-based DBS Bank. 'I think BI realizes that it is futile to intervene so aggressively, like it did in June.'
However, the latest improvement did not cloud the fact that BI's forex reserves were still the fastest-depleting among central banks in Asia, as it had declined to $17 billion, or 15 percent, throughout this year.
Since the beginning of this year, BI had to dig deep in its forex reserves to support the rupiah, which has been under heavy strain due to Indonesia's wide current account deficit and capital outflows that created a huge shortfall of dollar supply-demand in the market.
For some policymakers, the fast depletion of forex reserves might remind them of the painstaking experience during the 1997-1998 economic crisis.
The financial calamity at that time was triggered by the exchange rate overshooting, after the rupiah became the subject of speculative attacks as BI ran out of forex reserves to support the pegged currency.
The central bank apparently wanted to ensure that history would not repeat itself, strengthening its line of defense by extending two bilateral forex swap lines with Japan and China that were worth additional forex reserves of $12 billion and $15 billion, respectively.
BI also established new swap agreements with South Korea that were equivalent to $10 billion, as well as joining forces with ASEAN countries in regional swap agreements that valued $2 billion.
All the swap lines would open access for BI for a cumulative $40 billion of additional forex reserves that the central bank could utilize anytime if it bumps into a liquidity shortage. It would cushion the economy even in a possible worst-case scenario ' estimated by Finance Minister Chatib Basri as a situation when the country came across a $30 billion current account deficit and $10 billion capital account deficit.
BI 'does not want to underestimate the risks' that Indonesia's economy could come across, given the uncertain outlook in the global economy, central bank spokesperson Difi Johansyah said when asked about the swap line agreements.
'If the US really proceeds in tapering its quantitative easing, we'll never know how severe its impact will be to our economy,' he stated.
Economists say that the swap lines were a better option for BI to strengthen its forex reserves, especially when compared to seeking loans from donor organizations such as the International Monetary Fund (IMF) or the World Bank.
'Many donor organizations impose various rules and requirements, limiting the flexibility of borrower countries to utilize the funds,' said Destry Damayanti, the chief economist of state-run Bank Mandiri.
However, executing such bilateral swaps might also be more complicated than initially expected.
Such types of agreements usually come with strict requirements, such as requiring some conditions stipulated by the IMF or the ASEAN+3 Macroeconomic and Research Offices (AMRO) to go beyond certain thresholds, before the funds would be available, warned Hak Bin Chua, an economist with Bank of America Merrill Lynch.
'These details are not provided and we doubt the full $40 billion is available unconditionally,' Chua said.
Some analysts also argued that the bilateral swap lines might offer no more than positive sentiment in the short run. Unless policymakers are able to solve Indonesia's structural problems, the rupiah would continue to face heavy pressure and BI would continue to dig deep in its forex reserves, they warned.
'So far, the drop in Indonesia's foreign reserves largely reflected the current account deficits, rather than capital outflows,' said Ho Woei Chen, an economist with the United Overseas Bank (UOB) in Singapore.
'The currency swap arrangements could help support sentiment in the short term, but we believe the US dollar and Indonesian rupiah will still face upward pressure until the current account improves,' he explained.
