Bank Indonesia Pledges to Counter Market Concerns on Deficit

Bank Indonesia Governor Darmin Nasution said the central bank will take steps to respond to concerns about the country’s current-account deficit and balance of payments, which has led to a slump in the rupiah.

Policy makers will use market operations instead of issuing new rules to ease worries that are “out of proportion,” Nasution told reporters in Jakarta today. Exporters aren’t converting their revenue into rupiah, contributing to a lack of dollar supply in the market, he said.

The rupiah dropped 5.9 percent against the dollar last year, the worst performance among Asia’s 10 most-traded currencies excluding the yen, as rising imports and declining exports led to a widening current-account deficit. The weakening currency risks exacerbating price pressures in a nation where growth has exceeded 6 percent for eight quarters, and the central bank has intervened to support its exchange rate.

“With exports starting to improve but with imports still growing high, the market sees there’s concern over a weakening balance of payments,” Nasution said. “This analysis isn’t wrong, but our balance of payments actually isn’t bad because in terms of balance of payments, we can’t look at only the current-account deficit but we must also look at capital and financial transactions which are still positive.”

The rupiah rose 0.3 percent to 9,635 per dollar as of 5:39 p.m. in Jakarta today after declining as much as 1.3 percent earlier. It reached the lowest level since September 2009 yesterday.

Fuel Subsidies

The current-account shortfall last year was probably 2.4 percent of gross domestic product, Finance Minister Agus Martowardojo said Jan. 7. That would be the largest since 1996. Indonesia has recorded a current-account deficit for the four quarters through September 2012.

Policy makers have been unwilling to allow the rupiah to adjust appropriately to the shortfall, Paul Mackel, HSBC Holdings Plc’s head of Asian currency research in Hong Kong, wrote in a report released yesterday.

“The natural adjustment of a weaker currency to a current-account deficit is not being allowed to filter through, which could help the deficit to stabilize,” Mackel said. “The other issue for the deficit is that due to onshore fuel subsidies, demand remains high even when prices push higher.”

While policy makers have left the benchmark rate unchanged since a cut in February 2011, the central bank has raised the lower end of its interest-rate corridor, known as the deposit facility rate. The rate it pays lenders on overnight deposits was increased in August to 4 percent from 3.75 percent.

‘Cautious Approach’

“We are aware Bank Indonesia tends to take a more cautious approach and it is likely in the coming months that it will only narrow the interest-rate corridor, while providing some U.S. dollar liquidity via the swap and spot markets,” Mackel wrote. “In our view, monetary tightening will have only a small impact on the current-account deficit, and this would be better addressed with fuel subsidy reform. As such, the path of Bank Indonesia is unlikely to ease the pressures being faced by the Indonesia rupiah”.

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