The Jakarta Post
The central bank's foreign exchange (forex) reserves dropped below the US$100 billion mark by the end of June, as massive capital outflows during the month forced monetary authorities to pump more greenbacks into the banking system.
Bank Indonesia's (BI) forex reserves, used by the central bank to supply dollars to the market, fell by a jaw-dropping $7 billion to touch $98.1 billion, causing the reserves to fall below the psychological threshold of $100 billion for the first time since February 2011.
The monthly drop in the forex reserves in June was the largest since the 1998 financial crisis.
BI Governor Agus Martowardojo said that the central bank was forced to dig deep into its forex reserves to support the rupiah, which faced pressure in June due to huge capital outflows and high dollar demand from companies repatriating earnings and foreign debt payments.
Agus was quick to calm the markets over the depleting reserves, noting that the $98.1 billion figure was still sufficient to cover almost five-and-a-half months of imports and foreign debt payments.
'When we bumped into crisis in 2005 and 2008, our forex reserves were equivalent to 4.3 months of
imports,' he told a press briefing in his Jakarta office on Friday night.
'What we have now is more than sufficient for our mission to stabilize the currency.'
BI's figures showed that foreign investors pulled out a staggering $4.1 billion from Indonesia's stock and bond markets throughout June, due to concerns over tighter global liquidity after the US central bank hinted at a possible tapering of its monetary stimulus policy. The stimulus had led to liquidity being pumped into emerging economies.
The steep decline in June means that, in the first six months of this year, BI's forex reserves have been depleted by an eye-watering $14.7 billion, the steepest decline among central banks in Asia.
Any weakening of forex reserves below $100 billion might trigger panic in the market and exert heavy pressure on the rupiah, economists have warned.
The rupiah fell 0.16 percent this week to close at 9,945 to the US dollar on Friday, according to prices from local banks compiled in the Jakarta Interbank Spot Dollar Rate (JISDOR).
Pressure on the rupiah is expected to intensify on Monday, when the market will be able to respond to the heavy decline in BI's forex reserves.
'This sustained forex reserves depletion is unlikely to sit well with foreign investors or the rating agencies,' Philip McNicholas, the head ASEAN economist of BNP Paribas, said on Friday.
'Further policy action will likely be required. The deterioration in external liquidity ratios may prompt a negative rating action by either Fitch or Moody's ' be it a move to a negative outlook, or a straight downgrade,' he added.
The newly-appointed central bank governor, Agus, is expected to take bold action during BI's monthly board of governors' meeting next Thursday.
In last month's meeting Agus surprised the market by hiking BI's key rate by 25 basis points to 6 percent, the first adjustment in 15 months.
Analysts have blamed the heavy depletion of BI's forex reserves on its strategy of intervening too much to ensure that the heavy capital outflows will not weaken the rupiah below the 10,000 per dollar barrier.
In their reports released this week, investment bank Morgan Stanley said that the rupiah had been among the top-10 best performing currencies within emerging markets since May 22, while the World Bank noted that the overvalued rupiah had actually undermined the country's competitiveness.
To strengthen Indonesia's external position, 'a combination of somewhat tighter monetary policy and a continued orderly depreciation of the rupiah may be appropriate', the World Bank wrote in its report titled 'Adjusting to Pressures'.
'Greater tolerance of currency weakness, while potentially difficult to stomach on a psychological level in the near-term, would be beneficial to both market confidence and the economy over the longer-term,' added McNicholas from BNP Paribas.
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