Indonesia open to interventions to defend currency

The central bank of Indonesia says it will make more interventions to make up 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 said.

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 per cent 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". The central bank 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 per cent 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 January 9.

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

Last week, the central bank 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 the central bank 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 the rupiah to the central bank'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.