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Indonesia's foreign reserves hit two-year low

Indonesia's foreign reserves hit two-year low U.S. rate hikes have put downward pressure on the rupiah, which dippe...

Indonesia's foreign reserves hit two-year low

U.S. rate hikes have put downward pressure on the rupiah, which dipped below 15,000 to the dollar earlier in October. © Reuters

SINGAPORE -- Indonesia’s foreign reserves have fallen to a level not seen for two years after the central bank's repeated interventions in the currency market to defend the rupiah.

Given the pace of the decline, some market watchers believe the bank's strategy may soon become unsustainable.

Bank Indonesia announced on Oct. 5 that, at the end of September, the country’s foreign reserves had fallen by $3.1 billion on the month to $114.8 billion, marking an eighth straight month of decline. The figure also logged its lowest level since November 2016, and the second-largest decline since the start of the year, trailing only that seen in February.

U.S. rate hikes are putting downward pressure on the Indonesian currency, and the central bank has reacted by buying rupiah and selling dollars, leading to the decline in foreign reserves.

Reserves have now fallen by 13% from their peak in January, and it is unclear how long Bank Indonesia will be able to continue propping up the rupiah.

Due to a rapid increase in imports, the country’s total reserves-to-import ratio dropped from 10 months to seven and a half months over the same period. According to the International Monetary Fund, countries need to keep reserves that can cover a minimum of three months' worth of imports.

Several countries increased their reserves after the Asian currency crisis in a bid to raise the ratio, and many will find it increasingly difficult to dig into what they have accumulated.

Earlier in October, the rupiah dipped below 15,000 per dollar, its lowest level in nearly 20 years. If buying rupiah ceases to be an option, Bank Indonesia may be forced to raise interest rates further to continue defending the currency.

The central bank has already raised rates five times since May. If the rupiah weakens any more, "Bank Indonesia could decide on a rate hike at its extraordinary meeting ahead of the monetary policy meetings on Oct. 22 and 23," said Hirofumi Suzuki, an economist for Sumitomo Mitsui Banking in Singapore.

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Source: Google News Indonesia | Netizen 24 Indonesia

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