Indonesia vows to go all out to defend rupiah

Jakarta (The Jakarta Post/ANN) - The central bank says it will perform more interventions to fill liquidity shortage in the domestic dollar market as well as to prolong rupiah's recent stability.

"We must be bold in entering the market to reduce the gap between supply and demand in the foreign exchange market," Bank Indonesia (BI) Deputy Governor Hartadi A. Sarwono told reporters on Friday.

The gap existed because most foreign direct investments (FDI) coming into Indonesia were in the form of tangible goods and raw materials, with only 20 percent coming in the form of dollars, he explained.

The rupiah has become more stable recently and Hartadi said that the central bank was keen to prolong the situation by using "all existing monetary instruments possible". BI would address the supply-demand gap predicament in the local currency market, and further intervene when required, according to Hartadi.

"If the dollar demand is high - say, from soaring oil imports, for instance - then we will perform more interventions," he said.

The rupiah slid 0.2 percent to 9,653 on Friday, according to prices from local banks compiled by Bloomberg. The recent stability of the rupiah has boosted market confidence, as the currency's one-month implied volatility - a measure of expected moves in exchange rates used to price options - declined to the lowest level since Jan. 9.

Analysts previously claimed that BI had been backing away from currency intervention and instead had been opting for piling up its foreign exchange (forex) reserves, which stood at US$112.8 billion in December, their highest level in six months.

Last week, BI stated that it was ready to dig deep in its forex reserves to supply dollars to oil and gas company PT Pertamina and state utility company PLN. Under an agreement signed by BI and the State-Owned Enterprises Ministry last week, the two state energy companies are forbidden from buying dollars on the money market for an unspecified period of time.

Analysts attributed the recent strengthening of rupiah to BI's intervention. Pertamina and PLN are among the nation's biggest dollar buyers, accounting for roughly one-third of the market's dollar demand, due to their huge demand for oil imports.

Enrico Tanuwidjaja, an economist with the Royal Bank of Scotland (RBS), said that the domestic currency market had underlying problems that might not be resolved by the central bank's intervention.

"One way to address the underlying problems is via increasing its Fasbi [overnight deposit facility rate]," he wrote in a research note released this week. "Another is to increase the dollar supply in the market by deepening the domestic financial market, such that exporters are more willing to repatriate export proceeds."

At present, the Fasbi rate offers an interest rate of 4 percent per year, 175 basis points below BI's policy rate - a spread that many analysts describe as too wide. Raising the Fasbi rate would reduce the money supply in circulation and, consequently, shore up the rupiah.

Analysts also feared that pressure on the rupiah in 2013 might also stem from the trade deficit, to which the RBS referred as "a key concern for investors" throughout 2013.

Trade Minister Gita Wirjawan has forecast that Indonesia might see a trade deficit of around $2 billion this year, as the country is unlikely to see a significant rebound in its exports, with imports remaining strong due to investment growth that invites capital goods from overseas.

Nevertheless, Hartadi expressed optimism that there would be less strain on Indonesia's trade balance this year, predicting exports to recover due to a brighter outlook in the world's economy.

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