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Forex reserves expected to bounce back after sharp drop

Indonesia’s foreign exchange reserves dived deeper in May as the government paid off some external debt and foreign firms in the country needed foreign exchange for dividend payouts, which peaked in the second quarter, Bank Indonesia (BI) recently announced

Marchio Irfan Gorbiano (The Jakarta Post)
Jakarta
Sat, June 15, 2019

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Forex reserves expected to bounce back after sharp drop

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span>Indonesia’s foreign exchange reserves dived deeper in May as the government paid off some external debt and foreign firms in the country needed foreign exchange for dividend payouts, which peaked in the second quarter, Bank Indonesia (BI) recently announced.

The value of foreign exchange reserves fell by US$3.94 billion to $120.3 billion in May from $124.3 billion recorded in the preceding month. The monthly drop was the largest since March 2015, when the forex reserves dropped by $3.97 billion. It follows a decline in April, when the forex reserves dropped by around $200 million.

The central bank estimated that the latest foreign exchange reserve level was equal to 6.9 months of imports or 6.7 months of imports and payments on short-term external government debt. The current foreign exchange reserve level was well above the international adequacy standard of around three months of imports.

BI spokesman Onny Widjanarko said in a statement that the slump in the foreign exchange reserves in May was driven by payments on external government debt as well as a decline in foreign exchange placed with the central bank in anticipation of high demand of foreign exchange in line with the dividend payment cycle of foreign firms and the Idul Fitri holiday season.

Onny added that the central bank deemed the latest foreign exchange reserve level adequate to support the resiliency of Indonesia’s external sector and maintain macroeconomic as well as financial system stability.

Economists have projected that the foreign exchange reserves would bounce back in the upcoming months, as seasonal factors such as dividend repatriation had ended, while the government also issued foreign-denominated global bonds in June, which would bolster the foreign exchange reserve level in the short term.

The government recently issued $750 million worth of global bonds with a 10-year tenor and $750 million euro worth of global bonds with a seven-year tenor, harnessing the positive momentum for Indonesian bonds after Standards and Poor’s (S&P) upgraded the country’s sovereign credit rating to BBB in late May.

Center of Reform on Economics (CORE) Indonesia research director Piter Abdullah said the foreign exchange reserve level going forward would be heavily dependent on BI’s dual intervention policy in the money and secondary bonds markets to stabilize the rupiah, which had drained the reserves.

“Should the rupiah be stable, meaning no additional expenditure of foreign exchange reserves to interfere in the rupiah’s exchange rate, then the reserve [level] will increase in June,” said Piter, taking into account the global bonds issuance to bolster the reserves.

Asian Development Bank (ADB) Institute economic observer Eric Sugandi also said that, provided there were no massive pressure factors triggering foreign capital outflows, foreign exchange reserves could go up going forward, as high US dollar demand would ease in the upcoming months.

In addition to the expected reduction of US dollar demand, Samuel Sekuritas economist Lana Soelistianingsih said increased confidence from foreign investors after the conclusion of the election dispute was hoped to bring more foreign capital into the country and bolster foreign exchange reserves.

“We hope that, after [the electoral dispute] ends, foreign investors will come in until the end of the year, which could increase the foreign exchange reserve level,” said Lana.

The Constitutional Court is expected to announce its decision on the result of the April 17 presidential election by the end of this month, after opposition ticket Prabowo Subianto and Sandiaga Uno turned to the court to challenge the results announced earlier by the General Elections Commission (KPU).

She added that the issue of a rate cut by the United States Federal Reserve before the end of this year would also add to confidence on the part of foreign investors to enter emerging markets.

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