Bank Indonesia Steps Up Dollar-Buying for War Chest, Nomura Says

Bank Indonesia is keeping the rupiah from strengthening as it steps up dollar-buying to boost foreign-exchange reserves before the U.S. raises interest rates, according to Nomura Holdings Inc.

Three-month implied volatility in the Indonesian currency has averaged 9.25 percent this month, compared with 10.89 percent in the year through October, data compiled by Bloomberg show. The rupiah has weakened 0.6 percent in November even as a cut in fuel subsidies helped lure $1.2 billion of inflows to the country’s stocks and local-currency bonds.

“Bank Indonesia is probably taking this opportunity to continue to accumulate dollars to build up its war chest, trying to reduce the external vulnerability, which we think is very high,” Craig Chan, head of foreign-exchange strategy for Asia ex-Japan at Nomura in Singapore, said on a teleconference call today. “If you look at the foreign-exchange reserves coverage ratio of Indonesia, they are particularly weak relative to the region.”

While Indonesia’s reserves have increased by 13 percent this year to $112 billion, the stockpile is only enough to cover 6.6 months of imports, central bank figures show. That’s less than 10.8 months in the Philippines and 8.8 in Malaysia, leaving Southeast Asia’s largest economy vulnerable to sudden outflows as the Federal Reserve moves toward raising U.S. borrowing costs next year.

Export Effect

Bank Indonesia stepped up its dollar purchases in October, Nomura’s Chan said. The currency’s relative stability over “the past few sessions” shows the monetary authority is probably taking the opportunity to buy the greenback, he said.

“If Bank Indonesia buys dollars in the market it is actually for the purpose of monetary operations, not for the purpose of building foreign reserves,” central bank spokesman Peter Jacobs said in a mobile-phone text message today in response to questions. “At certain times we buy and at other times we sell. So as a consequence, the foreign reserves can rise or fall.”

Indonesia’s economy expanded 5.01 percent in the three months through September, the slowest pace in five years, and exports have fallen year-on-year in five of the first nine months of 2014.

President Joko Widodo, who took office Oct. 20, increased subsidized fuel prices effective Nov. 18, a move that Finance Minister Bambang Brodjonegoro said would free up 110 trillion rupiah ($9 billion) to 140 trillion rupiah in the 2015 state budget to be spent in other areas. The central bank raised its policy rate to 7.75 percent from 7.5 percent in an extraordinary meeting the same day to soften the inflationary impact.

“Investor confidence is looking up after the fuel-subsidy revision and Bank Indonesia’s quick response,” said Nurul Eti Nurbaeti, head of treasury research at PT Bank Negara Indonesia in Jakarta. “But the rupiah won’t be rallying too drastically as Bank Indonesia is comfortable with the current level and its impact on exports.”

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