Indonesia’s rupiah is “undervalued” after weakening to a four-year low and the central bank will keep its policy stance tight to restore investor confidence, Senior Deputy Governor Mirza Adityaswara said.
Bank Indonesia may use policy tools including interest rates and reserve requirement ratios to curb inflation and shrink the current-account deficit to below 3 percent of gross domestic product in 2014, he said in Jakarta yesterday. The current account has been in deficit for eight quarters and was at 3.8 percent of GDP in the July-September period.
“Our target is stability over growth,” Adityaswara said in an interview in his office. “When there’s an improvement in the current-account deficit, capital inflows will return and at that time we can ease on the tight-bias policy.”
Indonesia’s most aggressive interest-rate tightening in eight years has barely dented the current-account shortfall, prompting calls from some economists for more increases that may help it curb capital outflows. The central bank has raised its key rate by 1.75 percentage points since early June, damping growth in Southeast Asia’s biggest economy.
The rupiah fell 0.8 percent to 11,985 per dollar yesterday and has lost almost 20 percent this year, the worst performer among 11 major currencies in Asia tracked by Bloomberg. One-month rupiah forwards slid yesterday to a four-year low on speculation companies are boosting purchases of dollars to make year-end payments.
At 11,000 to 11,500 to the dollar, the rupiah will help the economy by reducing import demand, Adityaswara said. At the current level, it has “overshot” a suitable range, he said, declining to say whether Bank Indonesia will defend the currency. The central bank will guard volatility and ensure market liquidity, he said.
Since Governor Agus Martowardojo took the helm in May, Bank Indonesia has increased its benchmark rate five times to tackle the inflationary effect of increased fuel prices and support the rupiah as capital flowed out of emerging markets.
Investor sentiment worsened after the current-account deficit reached a record 4.4 percent of GDP in the second quarter, as an expanding middle class drives imports while commodity exports (IDEXPY) decline. The central bank expects the deficit to narrow to 2.5 percent of GDP in 2015, Adityaswara said.
There are signs of improvement. Exports rose for the first time in 19 months in October, helping the nation post a trade surplus, surprising economists. Consumer prices climbed less than analysts estimated in November from a year ago, and the 2013 inflation rate may be below 8.5 percent, Adityaswara said.
“Our policies are showing results,” said Adityaswara, who became the No. 2 official at the central bank in October. “We’re satisfied with our policies but we can’t be complacent.”
Adityaswara, 48, was head of capital markets and chief economist at PT Bank Mandiri (BMRI) before joining Indonesia’s deposit guarantee agency nearly three years ago. He was previously head of equity research at Credit Suisse Securities Indonesia and has a masters in applied finance from Sydney’s Macquarie University.
With the Federal Reserve poised to taper its monthly bond purchases, Indonesia must ensure its real interest rate, the difference between inflation and the benchmark, stays positive to attract capital flows, the senior deputy governor said.
The government’s first domestic sale of dollar debt raised less than half the targeted amount last month and foreign funds have pulled about $1.4 billion from Indonesia’s stock market so far this year.
Shares of Bank Mandiri, the country’s largest lender by assets, fell 2.6 percent yesterday while property developer PT Alam Sutera Realty slid 4.8 percent on concern there will be further rate increases. Adjusting consumer downpayment requirements for loans are another tool for Bank Indonesia to tighten policy, Adityaswara said.
Credit Suisse Group AG sees another 25 basis-point increase this month as the central bank’s new leadership shores up its “more hawkish credentials,” Robert Prior-Wandesforde, a Singapore-based economist, said in a Dec. 2 report. Bank Indonesia’s next interest-rate policy meeting is on Dec. 12.
“We see that the policy response to the market stresses has been appropriate,” Christian de Guzman, an analyst at Moody’s Investors Service, said at a briefing in Jakarta yesterday. “Whereas the previous Bank Indonesia was pro-growth, here now the focus has been solely on macro sustainability and stability.”
Monetary policies to narrow the current-account gap are short-term measures and Indonesia needs structural reforms such as diversified energy supplies and new oil production for sustainable results, Adityaswara said.
The government said in August it will ease mineral-export quotas and accelerate some infrastructure projects to shrink the deficit. The country also plans to allow foreign investment in airports and ports and provide incentives for profit repatriation.
Indonesia’s economic growth slowed to the weakest since the 2009 global recession last quarter. The central bank predicts 2013 economic growth of between 5.5 percent and 5.9 percent.
“Our economy won’t end up worse than it was in 2008 or in the first quarter of 2009 when we faced the collapse of advanced economies,” Adityaswara said. “Growth has slowed but it’s still good growth.”
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