Indonesia’s plunging rupiah twists the policy plot
Indonesia’s economy was primed for monetary easing later this year, but an unwelcome plunge in its currency is complicating matters for the Bank Indonesia and could force it to grudgingly raise rates as early as next week.
As Indonesian markets returned from a long Eid al-Fitr holiday this week, the rupiah sank to a fouryear low against a dollar buoyed by expectations that a hot U.S. economy will force the Fed to keep rates higher for longer.
As it slid past the psychological level of 16,000 to a dollar, stacking up a 5.25% loss for the year, some market participants felt Bank Indonesia (BI) might need to do something as drastic as a rate rise to arrest the slide. BI is the only central bank in the world whose main mandate is currency stability.
Reining in
Through 2023 and so far this year, it has used a range of intervention tools to keep the rupiah reined in as the dollar soared. Until last month, it was even expected to be among the rst central banks in emerging Asia to start cutting rates. As BI prepares to review policy on April 23, the thinking is changing.
A hike would be its rst since October. “I think the risk of a hike is not small. I wouldn’t put it as a baseline because they did hike previously, but I would think it’s not small,” said Alvin Tan, head of Asia F◣ strategy at RBC Capital Markets.
“I think denitely, the rhetoric will have to turn a bit more hawkish in order to lend support to the currency.” A rate rise would help bump up the yields that have been the rupiah’s big appeal historically, as well as the cause of its frequent bouts of volatility. That’s even as tame ination and growth concerns do not call for one.
Bonds losing appeal
Once a popular carry-trade currency, Indonesia’s highyielding bond market has lost appeal due to currency volatility and the waferthin spreads it o ers over dollar markets. Spreads between 10-year U.S. Treasuries and Indonesian government bonds were as wide as 7.5 percentage points four years ago. Now they are only two points.
Foreigners hold just 14% of outstanding Indonesian government securities, while back in December 2020 they owned a quarter. BI has been using a unique mix of direct rupiah buying in the spot foreign exchange and domestic non-deliverable forwards (DNDF) markets as well as purchases of government bonds to stem the rupiah’s decline. To be sure, the efforts have helped keep the rupiah from falling as much as peers such as the Korean won.
BI’s intervention in the DNDF market has also tamped down expectations of rupiah depreciation, with markets expecting a mere 0.5% decline in the next six months.
Edi Susianto, BI’s head of monetary department, told Reuters the central bank has been working with “relevant stakeholders” to prevent excessive rupiah volatility, for instance by staggering the demand for dollars from state-owned energy company Pertamina.
“So far, the co-ordination with Pertamina is going very well. If the demand is for later, then it is recommended to not enter the F◣ market for now,” said Mr. Susianto.
The central bank spent about $6 billion in the rst quarter alone, which left its foreign exchange reserves at $140.4 billion at the end of March.
But BI could be close to exhausting all its options, particularly as Fed rate cut bets recede. Daniel Tan, portfolio manager at Grasshopper Asset Management, said his fund has bought dollar-denominated bonds issued by Indonesian State rms this year, rather than risking exposure to rupiah assets. Some investors are betting on eventual Fed rate cuts later this year giving Indonesia’s rupiah some reprieve.