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FX reserves reached one-year high in June
Foreign exchange (FX) reserves surged to the highest figure so far this year in June, fueling optimism of an improved reserves figure for the remainder of the year
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Foreign exchange (FX) reserves surged to the highest figure so far this year in June, fueling optimism of an improved reserves figure for the remainder of the year.
Bank Indonesia (BI) announced Thursday the FX reserves amounted to US$109.8 billion last month, a $6.2 billion rise from the May level of $103.6 billion and also higher than the FX reserves figure recorded in the same period in 2015.
The central bank has attributed the soaring figure to the issuance of the government’s global bonds, the auction of BI’s foreign-denominated securities (SBBI), tax revenues and export earnings from the oil and gas sector, and the government’s own withdrawal of external loans.
According to BI, the latest figure is sufficient to fund 8.4 months of imports or 8.1 months of imports and foreign debt payments. It is above the international benchmark of three months of import payments.
“It [the reserves figure] was driven by the government’s global bond value that reached more than $4 billion,” BI Governor Agus Martowardojo on Thursday.
The government raised 100 billion yen ($940.1 million) in June through an offering of private bonds, dubbed Samurai bonds. They sold like hot cakes as investors chased high yields offered by the debt papers.
Earlier in the month, the government issued euro-denominated bonds worth €3 billion ($3.33 billion), which were oversubscribed by 1.79 times the issuance’s worth. It also issued global bonds worth $200 million in late June.
Data from BI reveal that capital inflows into Indonesia have been significant, reaching Rp 108 trillion ($8.25 billion) as of last week, compared to Rp 55 trillion throughout 2015.
The inflows led to the rupiah moving quite stable against the US dollar as they provided sufficient supplies of foreign exchange, said Bank Central Asia (BCA) economist David Sumual.
The stable value resulted in less intervention by BI, a move that usually erodes the central bank’s coffers. “I think the chances for the reserves to continue going up are high because of the fund repatriation from the tax amnesty,” David said.
KDB Daewoo Securities Indonesia analyst Dang Maulida expressed a similar view. “Prospective repatriated funds from the tax amnesty will help maintain a good FX reserves level,” she said.
BI does not make projections on the reserve amount, although it has predicted the upward trend will continue.
However, too high FX reserves can jack up the value of the rupiah against the US dollar. It will be a double-edged sword for the Indonesian economy as a stronger rupiah will not only make imports cheaper, but also make Indonesian exports more expensive and reduce export competitiveness.
According to May data from the Bank for International Settlements (BIS), the rupiah was still undervalued, considering its real effective exchange rate (REER).
The International Monetary Fund (IMF) defines the REER as the nominal effective exchange rate, which is “a measure of the value of a currency against a weighted average of several foreign currencies”, divided by a price deflator.
Monthly data from the BIS, whose membership comprises 60 central banks, show that the rupiah’s REER stood at 89.97 in May, below the fair value of 100.
With such an REER index, the rupiah theoretically should have been trading at 12,279 per US dollar in May, instead of 13,648 per US dollar.
Agus brushed off concerns about the lower value of the rupiah, saying that BI would keep the rupiah “in line with our economy’s fundamentals”.
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