Reserve adequacy is consequential for the robustness of a domestic economy. One of the international reserves’ roles is to temporarily finance the balance of payment deficits. A growth trend in a country’s reserves shows it has a stronger buffer to maintain a sustainable external balance. Today, Indonesia manages a surplus trend of its trade balance, but maintaining greater reserves would improve domestic resiliency in anticipating sudden macroeconomic shifts.

Amid the ongoing pandemic, the robustness of international reserves is also important to sustain confidence in both the domestic currency and the economic standpoint. In the event of market shocks, reserves could contribute to moderating exchange rate volatility.

But in Indonesia’s case, the needs for spot market intervention are relatively reduced as BI directs currency stabilization via domestic non-deliverable forward (DNDF), a derivative of foreign exchange (FX). By doing so, BI effectively routes US dollar demand to longer maturities. This helps BI manage an optimum number of FX reserves.

BI as the monetary authority is given the mandate to manage Indonesia’s official foreign reserves, according to Article 13 of the BI Law. Not only that, it is important to maintain its adequacy and attain an optimal value of FX reserves because of the escalated challenges of macro dynamics. As a result, the government’s external debt still dominates Indonesia’s FX reserves and adequate reserves management becomes crucial.

But the number speaks for itself. Central Banking Publications has recognized BI as reserves manager of the year. The achievement was not a walk in the park. Top-notch reserves management requires a fluency in complex and diverse global financial markets and the resilient institutional arrangement of FX reserves.

On a side note, the economics of financial assets always involve the cost of holding ones (such as the cost of funds). As the reserves increase, there is also an escalated interest for BI to acquire higher return differentials and correspondingly preserve them. This adds another rationale as to why it is necessary to strengthen the diversification of BI’s reserves portfolio. In addition to compensating the alpha risk in finance (i.e., the risk vis-à-vis individual stock performance), there should be sufficient room to gain more returns.

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