Indonesia Foreign-Exchange Reserves Fall to Two-Year Low

Indonesia’s foreign-exchange reserves fell to a two-year low in June as Bank Indonesia intervened to support the rupiah, adding pressure for the central bank to raise interest rates.

The country’s reserves fell to $98.1 billion last month from $105.15 billion in May, Bank Indonesia Governor Agus Martowardojo said in a press briefing in Jakarta late yesterday. That was the lowest level since January 2011, according to data compiled by Bloomberg. Bank Indonesia has trimmed its 2013 economic growth forecast and lifted its outlook for inflation to 7.2 percent-7.8 percent, Martowardojo also said.

The authority will probably raise the benchmark reference rate by a quarter of percentage point for a second straight meeting to 6.25 percent on July 11, a Bloomberg survey shows. Indonesia in June became the region’s first major economy to boost borrowing costs this year, as policy makers grapple with a slumping currency, a persistent current-account deficit and foreign-exchange reserves that have fallen this year.

“Like it or not, Bank Indonesia has to raise its reference rate or Fasbi rate to invite longer-term investment, if rupiah moves are volatile next week,” Lana Soelistianingsih, an economist at PT Samuel Sekuritas Indonesia in Jakarta, said before the briefing.

The rupiah was little changed at 9,943 per dollar yesterday, prices compiled by Bloomberg from local banks show. It has fallen about 6 percent in the past 12 months, the worst performer among 11 Asian currencies after the yen and the Indian rupee.

Recovery Thwarted

A recovery in the currency has hitherto been thwarted by the prospect of a scaling back in U.S. monetary stimulus, which spurred outflows from emerging markets in recent weeks.

Global funds sold 2.5 trillion rupiah ($250 million) of local-currency government bond holdings in the week after the government raised fuel prices on June 22, a move aimed at containing a current-account deficit that has hurt the currency.

Foreign exchange levels are still adequate to stabilize the rupiah and Bank Indonesia will consistently guard the currency, Martowardojo said yesterday.

“Bank Indonesia is ready with a policy mix as a pre-emptive step to guard economic stability,” Martowardojo said in the briefing.

The central bank’s policy options can include interest-rate and macro-prudential measures, said Peter Jacobs, director of communications at the central bank, in an interview on July 3. The authority released a rare statement after its July 2 weekly board meeting citing plans to boost the policy mix against accelerating inflation at the next monthly meeting.

Domestic Slowdown

The World Bank cut its 2013 forecast for Indonesian growth to 5.9 percent this month, saying accelerating inflation could hurt domestic demand as exports and investment cool. The increase in subsidized fuel prices, combined with monetary policy tightening, will probably hit already weakening investment growth and drag economic expansion to 5.7 percent in 2013, according to Credit Suisse Group AG.

“Domestic consumption may slow on the fuel price increase,’ Bank Indonesia Deputy Governor Perry Warjiyo told reporters at the briefing. Bank Indonesia now sees 2013 economic growth at between 5.8 percent and 6.2 percent.

In the days leading up to the June benchmark rate increase, the central bank signaled it was preparing to tighten policy. Warjiyo said late May that the authority was “moving toward a tightening bias.” At a June 11 board meeting, it decided to raise the Fasbi rate to 4.25 percent.

“The central bank is trying to give clear information and reduce negative sentiment about the nation’s economic conditions, as there’s an overreaction from foreign investors,” Anton Gunawan, an economist at PT Bank Danamon Indonesia in Jakarta, said before the briefing.

Before it's here, it's on the Bloomberg Terminal.