A US$10 billion bilateral financial arrangement between Indonesia and Singapore will boost confidence amid global liquidity risks and volatile markets, say economists.
On Thursday the two countries said they were working on a US$10 billion bilateral financial arrangement that supports monetary and financial stability.
The package comprises a bilateral local currency swap and US dollar repurchase agreements. The two central banks will finalise and announce the details soon, said a statement on Thursday from the Ministry of Foreign Affairs.
The package was among several new initiatives announced following the meeting between Singapore Prime Minister Lee Hsien Loong and Indonesian President Joko Widodo in Bali on Thursday for the Singapore-Indonesia Leaders' Retreat.
A local currency bilateral swap agreement (LCBSA) is a common form of bilateral financial cooperation between central banks. There are currently at least 50 bilateral swap agreements around the world.
Singapore has LCBSAs with the central banks of China and Japan for financial stability purposes.
Under such agreements, a central bank can obtain foreign currency from another central bank using its domestic currency at the prevailing exchange rate, with the agreement to reverse the transaction at the same exchange rate on a specified maturity date.
The objectives for accessing such local currency liquidity could differ across agreements, depending on the economic and financial ties between the countries. Generally, the intent is to support monetary and financial stability, as well as to promote local currency usage in trade and investment.
A USD repurchase agreement (USD repo) is also a common form of bilateral financial cooperation between central banks. The USD repo allows a central bank to provide dollars to another central bank in exchange for government securities, with the agreement to reverse the transaction on a specified maturity date.
The MAS has USD repos with various Asian central banks to enhance bilateral financial cooperation.
Having an arrangement when the rupiah is under pressure instills confidence and assurance to markets that Bank Indonesia has a ready reserve of support, said Chua Hak Bin, Maybank Kim Eng economist.
"It provides another layer of defence," said Mr Chua.
This is a highly positive and encouraging development, said Taimur Baig, DBS group research chief economist.
"We have long called for resource pooling in Asia, so that Asian economies can mitigate global liquidity risks and market volatility with regional safeguards," said Mr Baig.
In the aftermath of the 2008 global financial crisis, the US Federal Reserve arranged multi-billion dollar swap lines for a number of developed and developing economies, which had considerable impact in calming overshooting sentiments, Mr Baig recalled.
"We welcome MAS' leadership role in doing something similar at a time when global markets are experiencing fairly high degree of stress," he said.
"We are sure this will be of enormous benefit to Indonesia, and by virtue of assising the market stabilisation of one of the largest economies of Asia, Singapore's highly open and regionally integrated economy will benefit as well."
The rupiah has been hammered in the current emerging market rout, falling to a two-decade low. It has tumbled 11 per cent against the US dollar since the start of the year.
The Indonesian government and Bank Indonesia (BI) have tried to curb imports and intervened in the currency markets to support the rupiah.
Maybank Kim Eng's Mr Chua said Indonesia's foreign reserves have fallen by about US$17 billion to US$114.9 billion in September from the peak of US$132 billion in January.
Indonesia's current account deficit widened to 3 per cent of GDP in 2Q and will likely widen further to 3.5 per cent to 4 per cent of GDP in 3Q, said Mr Chua.
The growing deficit has two drivers - booming e-commerce and the return of fuel subsidies, which is encouraging greater fuel imports and possibly smuggling, he said.
Imports of consumer goods were up 44 per cent in July/August. Import limits, exempted from duties, for online shopping have been cut to US$75 from US$100, effective Oct 10.
But Mr Chua said many consumer imports such as cosmetics or clothes cost less than US$75.
Containing these two forces is difficult, he said.
"Lifting subsidised fuel prices is politically difficult in the lead up to the 2019 presidential elections.
Reining in e-commerce will hurt promising start-ups, the most dynamic segment in the economy, and slow foreign venture capital inflows."