After the government of Indonesia unveiled the second installment of its economic policy package on Tuesday (29/09), the central bank (Bank Indonesia) followed suit by releasing a rupiah exchange rate stabilization package on Wednesday (30/09). Bank Indonesia’s package has three main pillars: (1) safeguarding rupiah rate stability, (2) strengthening rupiah liquidity management, and (3) strengthening foreign exchange supply and demand management.
The rupiah is in need of support as it has weakened about 18 percent against the US dollar since the start of 2015 (touching a 17-year low) amid further looming monetary tightening in the USA (higher interest rates), low commodity prices and the recent devaluation of China’s yuan. However, if we go back further in time - to late May 2013 when former Federal Reserve Chairman Ben Bernanke started to hint at the winding down of the US quantitative easing program - the rupiah has depreciated 49.5 percent against the greenback due to severe capital outflows. Although for Indonesian exporters a weaker rupiah should be positive as exports become more attractive on the global market, it also causes serious turmoil (for example local companies’ foreign debt position deteriorates sharply) and therefore the central bank has been defending the rupiah fiercely in recent weeks, specifically by using its foreign exchange reserves.
Indonesian Rupiah versus US Dollar (JISDOR):| Source: Bank Indonesia
(1) Safeguarding Rupiah Exchange Rate Stability
Bank Indonesia is to intervene in the domestic foreign exchange market (forward market) in order to balance supply and demand, supplementing its operations in the spot market.
(2) Strengthening Rupiah Liquidity Management
The central bank plans to issue three-month Bank Indonesia certificates of deposit (SDBI) along with two-week reverse repo tradable government securities (SBN) to absorb liquidity, prompting a shift toward longer tenor instruments.
(3) Strengthening Foreign Exchange Supply and Demand Management
This involves five policies that aim to strengthen foreign exchange supply and demand management, particularly by boosting supply and control demand:
a. Encourage forward selling transactions of foreign currencies. Currently, exporters are required to show an underlying document for every forward US dollar selling transaction exceeding USD $1 million. Bank Indonesia is to raise this threshold to USD $5 million per transaction, per customer. Also, the scope of underlying assets for forward selling will be broadened to include domestic and offshore foreign currency term deposits.
b. Bank Indonesia is to issue foreign currency Bank Indonesia securities (SBBI) to deepen the financial market, particularly on the foreign exchange market.
c. The holding period of Bank Indonesia certificates (SBI) is reduced from one month to one week in order to attract foreign capital inflows.
d. Interest tax paid on term deposits for exporters who deposit their foreign exchange earnings at local banks will be cut.
e. Bank Indonesia ensures greater transparency and information availability when using foreign exchange by strengthening the foreign exchange flow report (LLD). LLD participants are obliged to report their use of foreign exchange through supplementary supporting documentation for transactions of a certain value.