Indonesian Intervention Jeopardized in Rupiah Plunge

Indonesia is consuming foreign-currency reserves at the fastest pace in Asia as policy makers struggle to contain the rupiah’s plunge, a sign to Mandiri Sekuritas that the central bank will pare intervention.
Reserves dropped 5.7 percent in a year to $105 billion in May as Bank Indonesia sold dollars to bolster the rupiah, while policy makers from South Korea to Taiwan added to coffers, data compiled by Bloomberg show.
The rupiah fell to 5.6 percent below the local spot rate in the offshore non-deliverable forward market on Tuesday, more than double the next-biggest discount among 34 emerging-market currencies tracked by Bloomberg.
Overseas investors have pulled $1.9 billion from stocks and local-currency bonds in Southeast Asia’s largest economy in the past two weeks, putting pressure on the rupiah as rising US Treasury yields lure capital from emerging markets.
Defending the currency helped reduce reserves to the equivalent of 6.6 months of imports, the worst ratio in Asia after India, according to Australia & New Zealand Banking Group Ltd.
“Bank Indonesia will hold foreign-exchange reserves above the $100 billion psychological level,” Leo Rinaldy, a Jakarta-based economist at Mandiri Sekuritas, a unit of the nation’s largest lender by assets, said in a June 10 interview.
“If the rupiah pressure continues, they won’t go further on intervening in the spot market.”
Fasbi Rate
One-month non-deliverable forwards on the rupiah weakened as much as 4.2 percent in the last three days to 10,412 per dollar, the lowest since August 2009, according to data compiled by Bloomberg.
The exchange rate quoted by Indonesian banks declined about 0.3 percent to 9,826 over the same period. The currency slipped as 10-year US Treasury yields climbed to a 14-month high of 2.29 percent on Tuesday, from 1.76 percent at the end of last year.
The government is concerned about the widening gap between the forward and the spot rates, Deputy Finance Minister Mahendra Siregar told reporters in Jakarta on Tuesday, a day after Difi Johansyah, a spokesman for the central bank, said the monetary authority remains in the market to stabilize the rupiah.
Bank Indonesia raised the rate it pays lenders on overnight deposits as a preemptive step to maintain monetary stability, it said in a statement published on its website on Wednesday.
It increased the deposit facility rate, also known as the Fasbi, by a quarter of a percentage point to 4.25 percent effective on Wednesday.
The one-month non-deliverable forward rose 1 percent to 10,178 per dollar as of 8:32 a.m., while the spot rate fell 0.1 percent to 9,826.
Current Account
“Bank Indonesia is fully prepared to take necessary measures to stabilize monetary conditions in light of recent rupiah depreciation,” it said in the statement.
Bank Central Asia, the nation’s largest lender by market value, was buying $1 for Rp 9,750 and selling the greenback for Rp 10,050, according to prices published on its website on Tuesday.
It’s becoming difficult to get the US currency onshore, Herdi Wibowo, the Jakarta-based head of fixed income at BCA Sekuritas, said last week.
Indonesia needs at least $1 billion a month to finance its current-account deficit, which grew to a 16-year high of 3 percent of gross domestic product in the first quarter, according to ANZ.
Foreign ownership of Indonesian sovereign debt as a proportion of the reserves is 29 percent, according to a June 10 report by BNP Paribas SA.
That was the highest after Malaysia’s 34 percent among five Asian markets tracked by France’s largest bank, which also include India, South Korea and Thailand.
‘Instill Confidence’
“It is important to try and keep their reserves above $100 billion in order to instill confidence,” Khoon Goh, a senior strategist at ANZ in Singapore, said in an interview on Tuesday.
“That’s a sign of how much capital outflows you can sustain.”
Morgan Stanley recommended in a note this week that clients sell the rupiah against the dollar via one-month non-deliverable forwards because limited intervention by the central bank will fuel further depreciation in the spot rate.
The government announced that it may adjust subsidized fuel prices in January, and President Susilo Bambang Yudhoyono made an increase conditional on parliament approving a compensation package for the poor on April 30.
Standard & Poor’s, which rates Indonesia at its highest junk level of BB+, lowered the outlook on the nation’s debt from positive to stable two days later on the basis that the momentum of reform was stalling.

Trade Deficit
Fuel prices will increase after the 2013 budget revision is finished by June 17, Coordinating Minister for the Economy Hatta Rajasa said last week.
There’s a 70 percent probability the price rise will happen given that the main coalition partners of Yudhoyono’s Democrat Party have indicated their support, Barclays Plc said in a June 10 research report.
“Bank Indonesia will intervene in the market until there’s clarity on the fuel-policy decision,” Mandiri’s Rinaldy said.
“The market expects that in mid-June there will be a decision,” otherwise the reserves can’t hold above $100 billion for much longer, he said.
Indonesia’s economy expanded 6.02 percent in the first quarter from a year earlier, the slowest pace since 2010, official data show.
Exports fell over the 13 months through April, and the trade deficit was $1.6 billion that month, compared with October 2012’s record-high $1.9 billion.
The rupiah has declined 2 percent this year, following a 6 percent drop in 2012, according to figures compiled by Bloomberg.
‘Still Healthy’
JPMorgan Chase & Co.’s trade-weighted index for the Indonesian currency has fallen 2.2 percent to 73.49 since touching this-year’s high of 75.18 on May 22.
“The recent depreciation is still healthy in our view,” Helmi Arman, an economist at Citigroup Inc. in Jakarta, said in an interview on Tuesday.
“Arguably, a weakening of the rupiah on a real effective exchange-rate basis is more desirable to correct the external imbalance by curbing import growth.”
Inflation may quicken to 7.7 percent should the government raise fuel prices, compared with 5.5 percent without an increase, central bank Deputy Governor Halim Alamsyah said on June 3 in Singapore.
Bank Indonesia will leave its benchmark interest rate at 5.75 percent on Thursday, according to all 19 economists surveyed by Bloomberg.
Credit Suisse Group AG forecasts the rupiah will weaken to 10,257 per dollar by the end of the third quarter, making it the most pessimistic among 23 respondents surveyed by Bloomberg.
The median estimate is for a level of 9,800 per dollar.
‘Some Guidance’
Indonesia has to address its deteriorating trade balance and easy monetary policy to restore investor confidence in its currency, Ray Farris, chief Asia strategist in Singapore at Credit Suisse, Switzerland’s second-biggest bank, said in an interview on Tuesday.
Bank Indonesia set its Jakarta Interbank Spot Dollar Rate, used by local lenders to settle currency derivatives, at 9,821 per dollar on Tuesday. That was 2.6 percent stronger than the Association of Banks in Singapore’s equivalent fixing, set at 10,078.
Indonesia’s central bank introduced its own onshore benchmark last month after the Monetary Authority of Singapore began an investigation into the offshore fixings in September.
“The spot rate is artificial and doesn’t measure market confidence,” Thio Chin Loo, a senior strategist at BNP Paribas in Singapore, said in an interview on Tuesday.
“There may be some guidance for banks from Bank Indonesia. They need to address the root of the problems, which are fuel subsidies and rising import costs.

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