Bank Indonesia Says Strong Rupiah Allows for More ReservesBy and
Rupiah’s current level is in line with economic fundamentals
Effectiveness of new benchmark rate hampered by bad loans
Southeast Asia’s best-performing currency is giving Indonesia’s central bank the opportunity to continue increasing foreign reserves from a four-year high, a senior official said.
“If we see the chance to build our reserves, then surely we will take advantage of it,” Doddy Zulverdi, Bank Indonesia’s executive director for monetary management, said in an interview at his Jakarta office on Friday. “We don’t need to be too forceful about it as our reserves are sufficient, but I wouldn’t say we have too much.”
Indonesia’s reserves have climbed 9.2 percent this year to $116 billion in September, the highest level since before the U.S. Federal Reserve signaled in 2013 that it would cease a bond-buying program, causing the so-called taper tantrum that pushed the rupiah down 21 percent that year. The currency has gained 5.6 percent this year, beating its regional peers, as foreign investors poured almost $12 billion into bonds and stocks and the government encouraged Indonesians with money abroad to repatriate funds as part of a tax amnesty program.
The currency declined 0.1 percent on Monday to trade at 13,055 a dollar as of 12 p.m. in Jakarta, prices from local banks show.
Zulverdi estimated that the current-account deficit will probably narrow to below 2 percent of gross domestic product by the end of the year, from 2.4 percent at the end of 2015, due to fund inflows and an improvement in trade, reducing the need for larger reserve levels. A government report Monday showed the trade surplus widened to $1.22 billion, the highest level since July 2015, even though exports declined.
“The rupiah is currently in line with our fundamentals and its direction is in line with our macroeconomic situation,” he said. “So our reserves are sufficient according to measures we have, but as a net-debtor nation, we will never feel 100 percent safe.”
The central bank has repeatedly said that it will keep the currency from strengthening too excessively. Policy makers have cut interest rates five times this year to help support the economy and offset the effect of a stronger currency and spending cuts by the government.
Bank Indonesia adopted the seven-day reverse repurchase rate as its benchmark in August to help better influence money-market rates. Economists are almost evenly split on whether the bank will keep the rate unchanged at 5 percent this week or lower it by 25 basis points, according to a Bloomberg survey.
While lending rates in the economy have come down, the process is being hampered by bad loans in the banking system, Zulverdi said. The central bank has lowered interest rates by 100 basis points in the first eight months of the year compared with a 52 basis-point drop in average borrowing costs.
“Transmission isn’t the issue here, it’s risk,” he said. “Banks are trying to rein in non-performing loans, so they’re not in a position to bravely lower rates to give out more and more loans. Banks are still consolidating.”