Economists believe BI’s proposal to help balance international dollar outflows would not cure the underlying structural problems that are crimping onshore liquidity in US dollars. The proposed bond is just the latest in a set of proposals by Indonesia’s central bank to raise the value of the rupiah against the US dollar. Other ideas included offering dollar term deposits.
The idea behind the bond issue is to give the central bank more foreign currency reserves with which to defend the value of the Indonesian rupiah.
Since the eurozone debt crisis worsened earlier this year, the rupiah’s value has slid against the US dollar on the back of risk aversion. The currency hit a three-year low of IDR9,645 to the US dollar on May 30, and has since been fluctuating around IDR9,500.
An attractive onshore US dollar bond issue from the central bank would encourage Indonesian exporters to repatriate some of the US dollars they earn offshore to buy into the deal. The proceeds from the bonds would bolster the central bank’s FX reserves, giving it more flexibility to strengthen the currency.
However, economists believe that issuing more debt would not be the best approach to improving the rupiah’s value.
“A US dollar bond would address the symptoms of the pressures that have cropped up, and could get them through temporarily, but it would not address the underlying structural conditions per se,” says Aninda Mitra, head of south-east Asia economics at ANZ.
A head of research for Asia ex-Japan at a global bank adds: “The proceeds of the bond would probably be used for currency intervention, which is the wrong starting point. I don’t think the Indonesian problem is one of risk aversion, but of monetary and macroeconomic policy.
“Whether it’s the mining sector or the banking sector, people are starting to wake up and say ‘these policies don’t gel, they are not those of a successful economy’.”
Experts believe that issuing onshore dollar bonds would send the wrong signal – that Bank Indonesia is worried they might lose all of its FX reserves, a situation that is highly unlikely given that they stand at $111.53 billion at the end of May.
Instead, economists and analysts believe Indonesia should use its FX reserves to help banks pay off their foreign currency-denominated debts.
“You wonder why they would do it when they have such large reserves,” says Erik Lueth, senior regional economist at RBS. “They have enough to redeem all their outstanding debt. In a currency slide, your Achilles heel [outstanding foreign currency debt] is the debt becoming bigger and bigger – that’s when you have a serious crisis. But if the government has enough reserves to step in, there will be no currency mismatch.”
According to Lueth, Indonesia’s FX reserves are substantial enough to be sufficient to this task, despite sliding from $116.41 billion at the end of April.
“I know that authorities are very wary to let [the FX reserves] drop below a certain level,” he says. “It’s the same in Korea. But what’s the use of having reserves if you don’t want to use them?”
ANZ’s Mitra adds that while Indonesia would probably be able to drum up local investor demand for a US dollar bond issue provided the coupon was right, it would not be wise to increase its reliance on portfolio flows to keep the currency stable.
“We expect a full-year current account deficit of 0.6% of GDP,” he says. “This will be the first full-year current account deficit since 1997, and it’s happening at a time when the basic current account balance has slipped into a small deficit and global portfolio flows remain quite volatile.
“The current accounts of other Asian countries are in a stronger position. Despite weakening external demand, they have high domestic savings which leave them relatively better positioned to deal with volatile portfolio flows.”
Bank Indonesia has not released any details of the bond, but bankers have predicted that if it conducted such a deal it would likely do so in early 2013. The central bank could not be reached for comment.