Indonesia: No plan for capital controls but central bank eyeing options on FX
JAKARTA, May 28 — Indonesia’s central bank said today it has no intention of implementing capital controls but is studying other policy options to manage rupiah and dollar liquidity, as investors dump riskier emerging market assets and flee to the safety of the dollar.
Selling of Indonesian stocks, bonds and the rupiah currency has intensified in recent weeks in line with other Asian assets as Europe’s deepening debt crisis and cooling global growth prompt global investors to head for the exits.
The sudden withdrawal of capital has added to fiscal strains in emerging economies from India to Brazil.
The exodus has been in sharp contrast to a buying binge in the last two years, when investors piled into assets in Southeast Asia’s largest economy, anticipating, correctly, that it would soon be promoted by ratings agencies to coveted investment grade status.
Sarwono: Staying vigilant. — Picture courtesy of mediaindonesia.comDeputy Governor Hartadi A. Sarwono said Bank Indonesia would remain vigilant and would increase efforts to facilitate the market if there was a liquidity shortage. He did not elaborate on the policy options.
“We don’t have any intention to implement capital controls. We will remain in the market and intervene as needed. We will also keep studying other policy options to manage rupiah and dollar liquidity,” Sarwono told Reuters.
Sarwono said the recent weakness in the rupiah was partly due to rumours that Jakarta was considering controls to stem the capital flight, though forex dealers said they had not been hearing such talk.
Bank Indonesia on May 10 held its policy rate steady for a third straight month and moved to shore up confidence in the rupiah and other assets.
It had surprised markets by cutting interest rates last October, despite few signs of actual cooling in the hot Indonesian consumer market.
Some dealers said the central bank had been stifling currency markets by offering dollars only to certain banks while others were forced to find dollars in the open market, further heightening volatility.
The rupiah was trading weaker than 9,400 to the dollar today, and has lost 3.6 per cent so far this year, making it the worst performing Asian emerging currency ahead of the ailing Indian rupee. Since October, the rupiah has lost more than 6 per cent.
IFR reported selling has been especially fierce in non-deliverable forwards markets, which are often dominated by foreign players. One-month NDFs have skidded from 9,450 to 9,710 to the dollar.
Three-year Indonesian government bonds — a long-time favourite of foreign investors — have given up all of their gains for this year in the last 10 days alone, IFR added. Overall foreign holdings of Indonesian bonds, however, has remained relatively steady.
Indonesian stocks, meanwhile, have tumbled around 8 per cent.
“I don’t think it (BI) can reverse USD/IDR’s up trend. A rate hike might help do that but that doesn’t seem on the cards,” said Jonathan Cavenagh, a senior FX strategist at Westpac in Singapore.
“Look at India and the rupee. The RBI has tried to do lots of things but sentiment towards USD/INR has remained quite bullish. If capital continues to flow out of an economy it is difficult for a central bank to fight that trend.”
Jakarta has raised interest rates for its monetary instruments such as its short-term debt, called SBIs, and term deposits to absorb excess liquidity, in an effort to stabilise the rupiah and manage short-term inflation.
The central bank in September issued a regulation requiring exporters to return funds parked overseas to Indonesia, a move aimed at adding dollars to the local financial system and protecting Southeast Asia’s largest economy from possible capital outflows if global risk sentiment worsens.
Indonesia’s foreign exchange reserves were US$116.4 billion (RM366.7 billion) as of April 30, roughly US$6 billion higher from the end of March, central bank data shows. — Reuters
