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Forex reserves swell as BI refrains from intervention
Bank Indonesiaâs (BI) foreign exchange (forex) reserves rose in June as dollar earnings rose and the central bank stepped back from intervention at a period when the currencyâs volatility surged to its peak this year
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ank Indonesia's (BI) foreign exchange (forex) reserves rose in June as dollar earnings rose and the central bank stepped back from intervention at a period when the currency's volatility surged to its peak this year.
BI announced on Monday that its forex reserves, used by the central bank to supply dollars to the market and stabilize the rupiah against greenback demand for imports and foreign-debt payments, rose by US$600 million to hit $107.6 billion by the end of June.
The amount was sufficient to finance six months of the country's imports and debt payments, or twice the international sufficiency standard of three months, the central bank said in a statement.
'The increase of reserves occurred because, first, in June the [dollar] earnings from oil and gas exports were higher than foreign-debt payments,' BI Deputy Governor Perry Warjiyo told reporters in Jakarta on Monday.
'Second, the need to perform intervention could be counterbalanced by the increase in BI's dollar term deposits, which have been on the upward trajectory,' he added.
The latest increase in BI's forex reserves was somewhat surprising, especially as the central bank's dollar reserves normally fall in June due the seasonally high dollar demand, as companies purchase dollars to repatriate their earnings overseas or pay their foreign debts.
For instance, in June of 2012 and 2013, BI's forex reserves fell by $5 billion and $7 billion, respectively.
In June this year, the rupiah weakened below the psychological level of 12,000 per level for the first time in four months.
The rupiah also became less stable, with the rupiah's one-month implied volatility ' a measure of expected swings in exchange rate ' rising by 110 basis points in the last week of June to hit 11.09 percent.
The treasury head of a major bank in Jakarta revealed on Monday that last month the central bank 'did not intervene much, with the exception of when the rupiah was trading close to breaching the 12,000 per dollar level. They [BI] only intervened when the rupiah rate saw a very high upswing,' said the bank executive, who preferred to remain anonymous.
Analysts have predicted that in the upcoming months, BI might have more work to do as the country's thin forex liquidity will expose the currency to sudden shifts in investor sentiment caused by developments on the economic and political fronts.
Tim Condon, an economist with ING Group, predicted on Monday that rupiah assets might 'underperform' their regional peers in the short-run, as the long interval between the election and the inauguration of Indonesia's new president was likely to be dominated by rupiah-negative news, such as the current-account deficit.
BI's Perry has estimated that the current-account deficit in the second quarter might top $9 billion, more than twice the first-quarter figure of $4 billion and higher than most analysts' estimates.
'More concerning, however, is the dearth of [forex] trading volume, which raises the risk of more disjointed moves in the rupiah should there be a negative turn in sentiment,' BNP Paribas economist Philip McNicholas wrote on Monday in an email interview from Hong Kong.
'Such an event is likely to prompt BI to increase efforts to smooth volatility,' he cautioned.
