More reserves to defend rupiah

Tuesday, 24 February 2009

The strengthening of central bank reserves following a new financial agreement between Indonesia and  Japan means BI is now in a better position to defend the rupiah which already fell 6.8 percent this year.

On Saturday in the Thai resort of Phuket, Japan and Indonesia agreed to increase the provision for their bilateral swap agreement (BSA), under the Chiang Mai Initiative, from US$6 billion to $12 billion.

“It will add to our foreign exchange reserves,” Bank Indonesia (BI) governor Boediono said in a press conference Monday. “There will be a signing between BI and the Bank of Japan later on.”

The “non-commercial” BSA will carry an interest rate of LIBOR plus 1.5 percent, which “is under the market rates”, Boediono added.

The Chiang Mai initiative was inked in 2000 in Thailand, aimed at creating a network of bilateral swap arrangements among the ASEAN+3 countries to address regional short-term liquidity problems.

ASEAN+3 includes the 10 members of ASEAN -Indonesia, Thailand, Malaysia, Singapore, the Philippines, Vietnam, Brunei, Myanmar, Cambodia and Laos -- along with three East Asian countries (China, Japan and South Korea).

Boediono said the money could be withdrawn whenever Indonesia wanted to increase its forex reserves, which currently stood at $50.87 billion on Jan. 31.

“When we think the market needs the money, we will make a withdrawal,” he said.

He added that BI was looking for possibilities to make other BSAs with other countries, but he declined to elaborate further.

On Monday, the rupiah rose 0.5 percent to 11,905 per dollar at 4:28 p.m. in Jakarta, according to data compiled by Bloomberg. The local currency, which dropped 17.5 percent last year, moved between 12,100 and 11,890.

Boediono said BI would maintain the rupiah at a “realistic” level. “The point is we want to keep the rupiah at a realistic level, but not volatile.”

Besides the BSA, Japan also agreed to provide financial support worth $1.5 billion for guaranteeing Indonesia’s planned yen-denominated bond, or the samurai bond.

“Our support is expected to help Indonesia’s effort in safeguarding the economy and financial (sector),” said Japan Ambassador to Indonesia Kojiro Shiojiri.

Finance Ministry head of fiscal policy Anggito Abimanyu said contigency loans from various multilateral and bilateral institutions would add to the dollar supply available for Indonesia’s foreign exchange reserves, and could be used to strengthen the rupiah.

Danareksa Research Institute chief researcher Purbaya Yudhi Sadewa commented that the current level of the rupiah was far weaker than its fundamental level.

“I think there are issues that weaken the rupiah, like banks’ exposure to derivatives, the bad trade balance and capital outflows. The rupiah is supposed to hover at the 10,000 level (per dollar),” he said.

He added the BI regulation to limit the purchase of foreign currencies by providing data on underlying transactions and a tax file number in each case had also contributed to weakening the rupiah.

“It pushes people to keep their dollars, as they’re afraid they can’t buy dollars back. BI should review the market reactions toward the regulation,” said Purbaya.

He also said that securing BSAs and other financial supports would strengthen the rupiah only if BI used funds to intervene in the market. “If BI can do that, positive sentiment will be seen in the market.” (The Jakarta Post).