Stronger rupiah allows for more reserves: Bank Indonesia

Jakarta

SOUTHEAST ASIA'S best-performing currency is giving Indonesia's central bank the opportunity to continue increasing foreign reserves from a four-year high, a senior official said.

"If we see the chance to build our reserves, then surely we will take advantage of it," Doddy Zulverdi, Bank Indonesia's executive director for monetary management, said in an interview at his Jakarta office last Friday. "We don't need to be too forceful about it as our reserves are sufficient, but I wouldn't say we have too much."

Indonesia's reserves have climbed 9.2 per cent this year to US$116 billion in September, the highest level since before the US Federal Reserve signalled in 2013 that it would cease a bond-buying programme, causing the so-called taper tantrum that pushed the rupiah down 21 per cent that year. The currency has gained 5.6 per cent this year, beating its regional peers, as foreign investors poured almost US$12 billion into bonds and stocks and the government encouraged Indonesians with money abroad to repatriate funds as part of a tax amnesty programme.

Mr Zulverdi estimated that the current-account deficit will probably narrow to below 2 per cent of gross domestic product by the end of the year, from 2.4 per cent at the end of 2015, due to fund inflows and an improvement in trade, reducing the need for larger reserve levels. A government report Monday showed the trade surplus widened to US$1.22 billion, the highest level since July 2015, even though exports declined.

"The rupiah is currently in line with our fundamentals and its direction is in line with our macroeconomic situation," he said. "So our reserves are sufficient according to measures we have, but as a net-debtor nation, we will never feel 100 per cent safe." The central bank has repeatedly said that it will keep the currency from strengthening too excessively. Policy-makers have cut interest rates five times this year to help support the economy and offset the effect of a stronger currency and spending cuts by the government.

Bank Indonesia adopted the seven-day reverse repurchase rate as its benchmark in August to help better influence money-market rates. Economists are almost evenly split on whether the bank will keep the rate unchanged at 5 per cent this week or lower it by 25 basis points, according to a Bloomberg survey.

While lending rates in the economy have come down, the process is being hampered by bad loans in the banking system, Mr Zulverdi said. The central bank has lowered interest rates by 100 basis points in the first eight months of the year compared with a 52 basis-point drop in average borrowing costs.

"Transmission isn't the issue here, it's risk," he said. "Banks are trying to rein in non-performing loans, so they're not in a position to bravely lower rates to give out more and more loans. Banks are still consolidating." BLOOMBERG