Friday, October 7, 2011

Forex reserves slide $10b on BI intervention

Forex reserves slide $10b on BI intervention
Esther Samboh, The Jakarta Post, Jakarta | Sat, 10/08/2011 7:57 AM
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Foreign exchange reserves declined by as much as US$10 billion through September as massive foreign sell-offs resulting from the eurozone crisis prompted Bank Indonesia (BI) to intervene in the foreign exchange markets rate to protect currency stability.

According to the BI website, the central bank’s forex reserves — set aside to purchase rupiah in order to maintain rupiah stability at times of large foreign capital outflows — declined to $114.5 billion by the end of September, down from $124.5 billion in August.

BI deputy governor Hartadi A. Sarwono considered the level of reserves “relatively huge”, equivalent to 6.5 months of import bills and government foreign debt payments, higher than the standard level of four months.

The central bank has been purchasing rupiah using its reserves during the month when foreign ownership in government bonds slid Rp 33 trillion, or 5 percent, in less than four weeks as worldwide investors sold risky assets amid uncertainty.

International fund managers sold Rp 7 trillion more in rupiah denominated assets funds than they bought, forcing the government to activate a crisis alert status on Sept. 14, which involved intervention in the secondary market and intensified financial market monitoring systems.

The rupiah dropped over 5 percent in September, which Hartadi considered in line with other countries in the region, breaching the Rp 9,000 barrier during the period after ranging between Rp 8,400 and Rp 8,900 throughout the year.

“We never want the [rupiah] drop to be too steep,” he said on Friday. “We have flexible exchange rates determined by the market, but if there are heavy fluctuations, we will intervene.”

In the short-run, the rupiah’s depreciation will be manageable as long as it “goes along” with regional peers. But in the long-run, BI still sees the currency strengthening.

Citi Indonesia’s chief country officer Tigor M. Siahaan also did not see the financial market pressures persisting, as he was confident that foreign funds would return given Indonesia’s strong fundamentals.

“At the end of the day, fund managers must invest their money. It’s what they do. They need to invest the managed funds in places that provide good returns,” he said, adding that Indonesia is among Citigroup’s 16 emerging markets investment priorities, among a list that also includes China, Brazil, India and Singapore.

BI, however, remained vigilant in continuing to monitor the possibility of forex liquidity shortages in the nation’s banking system as recent massive US dollar purchases might result in depleting forex liquidity if the situation persists.

“If there is a shortage, there will be action from us through monetary operations or other policies,” Hartadi said, adding that banks’ forex reserves stored at the central bank might be loosened to below the current requirement 5 percent level of banks’ forex deposits “if necessary”.

Bank Danamon chief economist Anton Gunawan said forex liquidity in the nation’s banking system was currently imbalanced, with big banks having excess liquidity, while reserves in others was declining.

However, banks’ forex liquidity is tightening in general, as shown by declining nostro accounts, which means banks are withdrawing from forex accounts overseas to be stored at home.

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