Indonesia’s Forex Reserve Jumps to US$129b in August

Former BI Governor Agus Martowardojo and the Governor Perry Warjiyo - Photo by Bank Indonesia

JAKARTA (TheInsiderStories) –Indonesia’s foreign exchange reserve asset position stood at US$128.8 billion by August 2017, a figure just US$1 billion higher than the one reported at the end of July 2017, at US$127.8 billion, Indonesian Central Bank (BI) said on Friday (8/9).

Executive Director of Communication Department of BI Agusman said, the increase of the foreign exchange reserve was primarily attributable to foreign exchange receipts – among others from government issuance of global bonds, tax revenues, and government oil and gas export proceeds, as well as auction of Bank Indonesia foreign exchange bills.

“The foreign exchange receipts surpassed the uses of foreign exchange, primarily for repayments of government external debt and Bank Indonesia foreign exchange bills matured during the period,” he said in a press statement.

The reserve asset position as of end-August 2017 adequately covered 8.9 months of imports or 8.6 months of imports and servicing of government external debt repayments, well above the international standards of reserve adequacy at 3 months of imports.

“Bank Indonesia considers the official reserve assets as able to strengthen the resilience of the external sector and maintain the sustainability of Indonesian economic growth,” he said.

Meanwhile, Senior Deputy Governor of BI Mirza Adityaswara said the slight increase of foreign exchange reserves derived from the increase of imports amid a stronger rupiah in recent days.

“If the rupiah gets too strong, it will encourage imports and inhibit local product sales,” he said.

BI will keep the rupiah currency at a stable level according to its fundamentals. He said if rupiah gets too weak it will harm importers or business players with debts in foreign currency.

Net Inflow

Despite the turbulent environment existing since 2013, Indonesia still enjoys a rising surplus, topping US$104.9 billion in net foreign inflow. Doddy Budi Waluyo, Executive Director of Bank Indonesia’s monetary and economic policy department, told The Insider Stories that Indonesia is still seen as a most favorable country among emerging market, thanks in part to the government’s consistent structural reforms and credible fiscal policy.

In addition, being awarded an ‘investment grade’ rating from Standard and Poor’s (S&P) last May also bolstered investors’ confidence.

He illustrated by pointing out that in 2011, the net inflow of foreign capital only reached $5 billion. This figure started to creep up gradually to $14.7 billion in 2012, settled a bit to $12.1 billion in 2013 due to ‘taper tantrums’, and rebounded to $23.5 billion in 2014. It started to decrease again in 2015, to $17.5, when the Fed raised their rate, reaching $16.8 billion in 2016.  In 1H 2017, foreign capital net inflow marked $15.3 billion.

“Capital inflow up until 31 August reached $9.8 billion on a year-to-date base, compared to the same period last year, when it sat at $11.2 billion, though it was slowing down. It has lifted our currency by around 0.97 percent against the US dollar on a year-to-date base,” he said.

Capital inflows are expected to rebound at the end of this year, as there should be no massive profit-taking, unlike last year: in November 2016, US presidential election was characterized by a capital reversal. Central banks clearly do not expect this kind of thing to happen again in the future.

According to the Institute of International Finance, foreign investors cut capital flows to emerging market debt and equities in August, reducing inflows to $15.8 billion, following a mood of caution and profit-taking; this was the lowest level of inflow since January’s $13.2 billion. Net capital flows to China, the world’s second-largest economy and largest emerging market, were negative, with some $23 billion in outflows.

China is considered an emerging market because of its exceptional growth rate.  Asia saw $6.1 billion in combined equity and debt inflows, led again by inflows to Indian debt. Latin America was close behind, with $5.9 billion – a four-month high – led by inflows to Brazil equities.

August marked the ninth consecutive month of positive inflows for the asset class. Through the first eight months of 2017, combined equity and debt portfolio inflows to emerging markets totaled just over $200 billion, nearly double the pace of the previous two years, IIF said.  A combination of increasing global growth, low interest rates and a weak dollar has fuelled the surge in emerging economy currencies and assets.

That pace remains behind the 2010-2014 average of $230 billion of inflows. Analysts also cautioned that flows tend to slow significantly in the later months of the year.

IIF forecasted another slow end to this year if markets begin to take the Federal Reserve more seriously in its moves in institute rate hikes and balance sheet unwinding.

Writing by Rahmat Fiansyah and Yosi Winosa