B

ank Indonesia (BI) has hinted that it might tolerate a weaker rupiah as the central bank argued that a somewhat bearish currency might be needed to strengthen the country'€™s external position.

'€œThere are times when the currency should be a bit weaker to improve the structure of our current account,'€ BI Senior Deputy Governor Mirza Adityaswara told a seminar held by the alumni association of University of Indonesia'€™s School of Economics (FEUI) on Friday.

'€œAfter our current account improves, then we can allow [the rupiah] to become stronger,'€ he said.

After enjoying its best monthly performance in four years in October, the rupiah went back into bearish mode as it weakened by 1.5 percent this month to trade at 11,404 per US dollar on Friday, according to the Jakarta Interbank Spot Dollar Rate (JISDOR).

The rupiah has depreciated in four out of five working days in November, but Mirza argued that a weaker currency might not be entirely a bad thing for the economy. '€œA too-strong currency would encourage people to borrow dollars without calculating the risks,'€ he said.

In addition, the BI executive noted that a weaker currency might help rein imports and boost exports, ultimately narrowing Indonesia'€™s current-account position, which widened to a historic high of US$9.8 billion, or 4.4 percent of gross domestic product (GDP), in the second quarter this year.

Mirza said the central bank '€œneeds to give room for the currency to trade at the level that reflects its fundamentals'€ so that the current-account deficit could be pushed down to a more sustainable level, which he estimated at below 3
percent of the GDP.

BI is scheduled to announce the third quarter figures for the current account '€” the broadest measurement of a nation'€™s international trade '€” on Wednesday next week.

The central bank is optimistic that the current-account deficit will narrow to 3.3 percent to 3.5 percent of the GDP in the third quarter, though analysts say that such a level remains too high and might still raise concerns among investors, ultimately triggering capital flight.

'€œThe battle is not over yet because, even if our current-account deficit narrows to 3.3'€“3.5 percent of the GDP, that level is still not good enough,'€ Helmi Arman, an economist with Citi Research, said in the seminar.

'€œIt means that we could still face the risk of capital outflows if the US Federal Reserve really proceeds in tapering its quantitative easing,'€ he said, suggesting BI push down the current-account deficit to below 2 percent.

Indonesia has posted current-account deficit for seven consecutive quarters, a situation that has translated into the widening of the dollar supply-demand gap in the local currency market and has exerted heavy strains on the rupiah.

The rupiah led declines among emerging economies'€™ currencies in the third quarter, during which the currency depreciated 14 percent and weakened below 11,000 per dollar for the first time in four years.

However, the rupiah rate of between 11,000 to 11,500 per dollar has already reflected the country'€™s economic fundamentals and thus is a '€œrational'€ value for the markets and businesses, according to Bimo Notowidigdo, the head of treasury with state-run Bank Negara Indonesia (BNI).

'€œIssues like Fed tapering might temporarily weaken the rupiah to 11,700 per dollar; but it might swiftly strengthen again because exporters already feel comfortable with the present rupiah rate,'€ he said on
Friday.

Analysts have said that BI is relaxing its intervention in the rupiah market as it needs to pile up its foreign exchange (forex) reserves in preparation for a more volatile financial market next year, which could pose threats of capital outflows.

Indonesia has among the lowest reserves-to-imports ratio in the region as BI'€™s forex reserves, which topped $97 billion by the end of October, can only cover around 5.5 months of imports, compared to around 6.7 months in India, or around 7.7 months in South Korea.