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Maintaining rupiah’s
stability
Tuesday, 24 March 2009 The central bank’s disclosure last week of the
US$22.6 billion in corporate overseas debts maturing this year and its
forecast of a likely contraction of more than 28 percent in Indonesian
exports should be welcomed as the reflection of its transparency
regarding our foreign reserve position and balance of payments outlook. But some may make the criticism that such revelations
will bring about a backlash against the rupiah and its stability. The
amount of corporate overseas debt maturing this year may indeed raise
great concern, as it represents over 40 percent of Bank Indonesia’s
foreign exchange reserves. Likewise, such a pessimistic estimate of
exports could further strengthen the negative sentiment toward the
rupiah, a development that may prompt speculative attacks on the local
unit. However, such great transparency bodes well for
market perception of the central bank’s management of monetary policy
and exchange rates. First of all, the disclosures show Bank Indonesia is
well apprised of the latest developments in the balance of payments and
is presumably geared up for precautionary measures to cope with the
situation. Such information could also serve as an early warning for the
government to take the necessary fiscal measures.
Moreover, further reading of the composition of the
corporate foreign debts should not cause inordinate worry because $17.4
billion or over 33 percent of the maturing debts consist of debts owed
by joint ventures to parent companies overseas, meaning that they will
most probably be rolled over.
When referring to Bank Indonesia’s line of defense
for the rupiah, currency speculators should consider not only its
international reserves, which amounted to almost $54 billion as of this
month, more than enough to finance nearly six months of imports, which
are anyway declining due to the weakening economy. The central bank has also beefed up its second-line
of defense for the rupiah making more than $31 billion in reserves
available as standby loans from the World Bank, Asian Development Bank,
Australia and Japan as well as in swap facilities under bilateral
arrangements with Japan, China and South Korea.
This doesn’t mean, however, the central bank can sit
back and relax. It should instead always closely monitor developments in
the foreign exchange markets, timely intervening whenever necessary to
prevent excessive volatility. Bank Indonesia, while maintaining the basic principle
of open capital account, has tightened control on the purchases of
foreign exchange for derivative transactions to reduce speculative
attacks on the rupiah.
The government regulation requiring palm oil and
mineral, coffee and rubber exporters to have letters of credit to cover
shipments worth more than $1 million is also part of the government’s
efforts to keep itself posted on foreign exchange flows. The L/C
requirement will loosen the flow of foreign exchange from exporters’
proceeds. The risk the rupiah may weaken is there amid the
steep fall in new foreign direct investment and the continuing
deleveraging process in the developed countries, which is drying up
portfolio capital inflows to emerging economies such as Indonesia. But President Susilo Bambang Yudhoyono’s strong
recommendation last month that the rupiah be beefed up closer to the Rp
11,000 level, as against the prevailing range of Rp 11,700-- Rp 11,900,
seemed undue intervention into the central bank’s policy. We should trust Bank Indonesia to set the comfort zone for the rupiah rate that is conducive for our export competitiveness and anti-inflation measures
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