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BI prepared for 'cyclical' capital outflows
Bank Indonesia (BI) says that it will remain watchful over potential pressure on foreign exchange (forex) reserves in the upcoming months, as the economy is entering a period when it normally sees a cyclical surge in capital outflows
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ank Indonesia (BI) says that it will remain watchful over potential pressure on foreign exchange (forex) reserves in the upcoming months, as the economy is entering a period when it normally sees a cyclical surge in capital outflows.
The outflows could potentially drain Indonesia's forex reserves, which are used to supply dollars to the market against demand for greenbacks for import and debt payments. The payments stem from mid-year earnings repatriation by local companies, according to BI director for monetary policy Solikin M. Juhro.
Investors' concerns about the high current-account deficit in the second quarter might also trigger outflows, he added.
'Some inflows will be held back, but it's a cyclical issue,' Solikin said on Monday.
'In the first quarter, the current-account deficit normally stays around the same level as in the fourth quarter. However, in the second quarter, economic activities pick up, inviting high imports that could widen the current-account deficit ' it's a normal cycle,' he explained.
Indonesia's forex reserves stood at US$102.6 billion by the end of March, relatively unchanged from the $102.7 billion the previous month, the central bank announced on Monday.
The amount is sufficient to finance 5.7 months of imports and foreign-debt payments, well above the International Monetary Fund (IMF) safe threshold of 3 months.
DBS Bank economist Gundy Cahyadi said that the accumulation of forex reserves should remain BI's policy priority this year, cautioning that Indonesia's reserves-to-imports and debt payment ratios were 'decent but they still stand among the lowest in Asia'.
BI's forex reserves have increased consistently since it eased its intervention in the currency market beginning in July, when the central bank's dollar disposal fell to $92.7 million, the lowest level in more than two years.
Analysts have said that the latest upward trend in forex reserves has been supported by smoother interbank dollar transactions, with the market currently flush with greenback liquidity, meaning that BI now no longer acts as the sole dollar supplier in the market.
Average daily transactions in the forex interbank market rose to a 30-month high of $1.1 billion in March, compared to $867 million in February, according to data from state-run Mandiri Sekuritas.
'It is encouraging to see BI's burden of providing foreign exchange to the market has decreased significantly as US dollar supply within the system continues to increase,' Mandiri Sekuritas' economists wrote in a research note.
Nonetheless, the central bank was told to remain vigilant as dollar demand would heighten this month, which could exert pressure on the rupiah and BI's forex reserves.
At least $3 billion raised from Indonesia's recent sovereign issuance would be used to refinance debts maturing in April, cautioned Philip McNicholas, an economist with BNP Paribas in Hong Kong.
The rupiah on Monday strengthened 28 basis points to hit Rp 11,282 per dollar, according to the Jakarta Interbank Spot Dollar Rate (JISDOR).
It is currently Asia's best performing currency in 2014, having appreciated by 7.7 percent year-to-date.
