Bank Indonesia reinforces foreign exchange reserves defense

Bank Indonesia reinforces foreign exchange reserves defense

INDONESIA - Bank Indonesia (BI) is attempting to shore up market confidence over the sufficiency of its foreign exchange (forex) reserves, doing everything from toning down its rupiah intervention to signing swap lines with its Asian central bank counterparts.

BI is now trying to halt the quick depletion of its forex reserves by aggressively absorbing dollars from its monetary instruments. At the same time, the central bank also stepped back from performing too much intervention for the rupiah and gave room for the currency to float at its market-determined rate.

The result of such a strategy was a surprising increase of its forex reserves, which had strengthened for two consecutive months to touch US$95.7 billion (S$118 million) by the end of last month, rising by a cumulative $3 billion since July.

"In recent weeks, BI seems to be more tolerant of where the rupiah is trading," said Gundy Cahyadi, an economist with the Singapore-based DBS Bank. "I think BI realises that it is futile to intervene so aggressively, like it did in June."

However, the latest improvement did not cloud the fact that BI's forex reserves were still the fastest-depleting among central banks in Asia, as it had declined to $17 billion, or 15 per cent, throughout this year.

Since the beginning of this year, BI had to dig deep in its forex reserves to support the rupiah, which has been under heavy strain due to Indonesia's wide current account deficit and capital outflows that created a huge shortfall of dollar supply-demand in the market.

For some policymakers, the fast depletion of forex reserves might remind them of the painstaking experience during the 1997-1998 economic crisis.

The financial calamity at that time was triggered by the exchange rate overshooting, after the rupiah became the subject of speculative attacks as BI ran out of forex reserves to support the pegged currency.

The central bank apparently wanted to ensure that history would not repeat itself, strengthening its line of defence by extending two bilateral forex swap lines with Japan and China that were worth additional forex reserves of $12 billion and $15 billion, respectively.

BI also established new swap agreements with South Korea that were equivalent to $10 billion, as well as joining forces with ASEAN countries in regional swap agreements that valued $2 billion.

All the swap lines would open access for BI for a cumulative $40 billion of additional forex reserves that the central bank could utilize anytime if it bumps into a liquidity shortage. It would cushion the economy even in a possible worst-case scenario - estimated by Finance Minister Chatib Basri as a situation when the country came across a $30 billion current account deficit and $10 billion capital account deficit.

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