Bank Indonesia’s (BI) policy measures and a narrowing current account deficit (CAD) will likely support the rupiah amid unfavorable financial market conditions, however risks remain as Indonesia continues to record new COVID-19 cases while facing limited healthcare capacity, experts warn.Fitch Solutions has revised it outlook for the rupiah for 2020 to 15,500 per US dollar from its earlier projection of Rp 16,750 after the recent gains the currency booked. The rupiah appreciated 13 percent from a recent low of Rp 16,575, a level unseen since the 1998 financial crisis, to Rp 14,610 on Monday, Bloomberg data show.“We believe that BI’s policy measures will continue to cushion the rupiah in the short-term,” the researchers said. “Moreover, a forecast narrowing in CAD in 2020 due to slightly cheaper imports, will also add to investors’ confidence in Indonesia’s fundamentals.” The central bank has taken several measures to stabilize the rupiah, including by direct intervention in foreign exchange markets, purchase of government bonds in the secondary market worth Rp 166.2 trillion (US$11.34 billion) and strike currency swap lines with major central banks including a $60 billion repurchase agreement with the US’ Federal Reserve.“Dollar liquidity and BI’s bond market activity will help attract foreign investors back to the bond market in the short-term horizon, which will provide support to the currency,” Fitch said.The country recorded a CAD of US$3.9 billion, or 1.4 percent of gross domestic product (GDP) in this year’s first three months, down from 2.8 percent of GDP in the previous quarter. Fitch Solutions expects the CAD to reach 2 percent of GDP this year, much lower than the 3.4 percent in a previous forecast, providing a lift to foreign exchange reserves that will help support the rupiah.Fitch Solutions, however, warned that the downside risks from COVID-19 could further erode the rupiah’s recent gains if the situation spiraled out of control, adding that downside risks remained elevated over the long-term due to a widened budget deficit. “The Indonesian government’s initial mismanagement of the COVID-19 outbreak led to a collapse in investors’ confidence in the country’s assets, including the rupiah,” it said.“Downside risks will continue to emerge from the COVID-19 outbreak in Indonesia. As we have noted, cases across Indonesia continue to rise at a rapid pace and the country has limited healthcare and financial resources to deal with a widespread outbreak.”The central bank now expects the currency to further gain against the greenback to “pre-pandemic levels” at around Rp 13,600 to Rp 13,800 per US dollar, BI Governor Perry Warjiyo said. It decided to hold its benchmark interest rate last week at 4.5 percent to maintain financial market stability.“We maintain our view that the rupiah remains fundamentally undervalued and will strengthen to reflect its fundamentals,” Perry told reporters in a streamed news conference on May 28.BI recorded a net outflow of $5.7 billion in the first quarter as foreign investors dumped Indonesian assets. From April 1 to May 14, however, the central bank booked $4.1 billion in net inflows, mainly in sovereign debt papers.The COVID-19 pandemic threatens the stability of Indonesia’s financial system, as it has weakened the country’s financial industry and macroeconomic outlook, as well as brought economic activity to a standstill, the Financial System Stability Committee (KSSK) said earlier this month.Economists have warned that nationwide loan restructuring programs and economic risks caused by the pandemic may tighten liquidity in several small banks and lead to higher non-performing loan ratios in the medium term, leaving banks in need of additional liquidity.Bank Central Asia (BCA) chief economist David Sumual said the central bank should aim to stabilize the currency to support the country’s weakening economic activity, adding that the rupiah’s fundamentals were currently around Rp 15,000 per US dollar.“The rupiah’s stability is the priority right now as the currency should be favorable for importers and exporters,” David told The Jakarta Post. “An over-strengthened rupiah may discourage economic recovery in the real sector.”Topics :
Bank Indonesia (BI) plans to require exporters of natural resources to convert their foreign exchange (forex) earnings into rupiah to stabilize the country’s currency, while it also continues to buy government bonds to support the economy amid the ongoing health crisis.Exporters of natural resources that earned more than US$300 million from 2019 shipments will be required to convert their earnings to rupiah, BI Governor Perry Warjiyo said during a meeting with lawmakers on Monday, adding that the measure was aimed at shoring up the rupiah’s stability and bolstering Indonesia’s external stability.“This is not capital control because we also need foreign funds, including portfolio investment and foreign direct investment,” Perry told House Commission XI overseeing financial affairs. “We will do this by considering the stability of the rupiah exchange rate.” The CAD narrowed in the second quarter to $2.9 billion, down from 1.4 percent of gross domestic product (GDP) in the first quarter to 1.2 percent of GDP.Meanwhile, the central bank has bought Rp 125.06 trillion worth of government bonds directly through auction and private placement, Perry went on to say, adding that this had increased the central bank’s ownership of government bonds to an accumulated Rp 536.67 trillion.“BI will take quantity measures by providing liquidity to support economic recovery from the impact of the coronavirus pandemic, including by supporting the government to accelerate the absorption of the 2020 state budget,” Perry said, adding that the central bank would continue to take measures to stabilize the rupiah and strengthen monetary operations.The central bank and the government have agreed on a Rp 574.59 trillion debt monetization scheme, with the central bank pledging to buy Rp 397.5 trillion in bonds and fully bear the debt costs. It has also pledged to remain as a standby buyer of government bonds in auction.The central bank has cut its benchmark interest rate, the seven-day reverse repo rate, by 1 percent so far this year. Many economists expect BI to cut its policy rate at least one more time this year.Permata Bank economist Josua Pardede said the central bank’s latest announcement, particularly the requirement for exporters of natural resources to convert their forex earnings into rupiah, had received a positive reception from investors, attributing the currency’s gains to the central bank’s latest move.“This will create positive sentiment in the near-term as the move will boost dollar supply in the country,” Josua told The Jakarta Post during a phone interview. “The new policy means that there will not be any capital control, which is a good sign for the market, because not every exporter will be required to convert their earnings, only those that shipped $300 million in value.”Topics : The effective date for the new regulations will depend on the stability of the rupiah, he said, adding that there would be a ceiling for the amount exporters kept in their bank accounts and anything above must be converted to rupiah.Exporters of natural resources are already required to retain their earnings in a special account under the current regulations.The rupiah appreciated 0.7 percent on Monday to Rp 14,670 per US dollar as of 3 p.m. Jakarta time and has lost 5.8 percent of its value throughout the year. To date, the rupiah has been one of the worst-performing Asian currencies in the third quarter.The central bank’s governor reiterated his view that the rupiah remained “fundamentally undervalued” and would strengthen further to reflect its fundamentals, supported by low inflation, low current account deficit (CAD) and attractive domestic financial assets, among other reasons.