Indonesian Fragility Shown by Drop in Reserves Amid Rupiah Surge

Updated on
  • Reserves fell in October even as rupiah rebounded 7 percent
  • U.S. jobs report spurs bets for Fed rate increase this year

A drop in Bank Indonesia’s foreign-exchange reserves last month even as the rupiah led emerging markets to surge 7 percent highlights the nation’s vulnerability to an increase in U.S. borrowing costs.

The Indonesian central bank’s stockpile fell for an eight month, by $1 billion to $100.7 billion, according to figures released late on Friday. The decline was due to rising costs to service the government’s foreign debt and the use of reserves to stabilize the rupiah, the monetary authority said in a statement. That suggests Bank Indonesia intervened to help its currency hold onto gains after it jumped 9.1 percent in the week through Oct. 9.

Reserves are now at the lowest level since January 2014 and are near the $100 billion level that’s often cited as a key psychological threshold, reducing Bank Indonesia’s buffer for when the Federal Reserve starts raising interest rates. The odds of that happening this year have risen to 70 percent, futures contracts show, after U.S. jobs data released Friday boosted the case for an increase. There were net outflows of $1.7 billion from the Indonesian economy in October, according to an estimate from Macquarie Bank Ltd.

“There were still capital outflows amid the dollar weakness," said Nizam Idris, head of currencies and fixed-income strategy at Macquarie in Singapore. “The appreciation in October was a one-off rather than a new trend."

Hedges Unwound

The rupiah fell 0.6 percent to 13,650 a dollar at the close in Jakarta after dropping as much as 1.2 percent earlier, according to prices from local banks. It’s lost 3.1 percent since its intraday peak last month of 13,228 on Oct. 15. The currency will weaken to 14,034 by the end of this year and to 14,500 by mid-2016, according to the median estimates in Bloomberg surveys.

The rupiah’s rally in October was aided by overseas funds unwinding hedges to take advantage of the reduced cost of protecting their currency exposure, Nizam said. The rupiah’s one-month onshore implied yield, a gauge of expected interest rates and fluctuations used to price forwards that are used to hedge against exchange-rate losses, was 9.6 percent on Monday, down from 15.98 on Sept. 30, data compiled by Bloomberg show.

“Hedging needs might come back so that would put pressure on the rupiah to weaken,” Nizam said. “The pressure on the currency isn’t over.”