Indonesia prepares for forex imbalances

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Darmin Nasution, governor of Bank Indonesia

Although the Greek elections have given the global economic community renewed hope for a solution of the European debt crisis in the medium term, Southeast Asian countries remain wary and prepare for fiscal stabilisation measures.

The central bank of Indonesia announced that it will continue to monitor the situation and prepare necessary anticipatory measures.

“We will boost the supply of foreign exchange on the market according to the requirement in order to stabilise the rupiah exchange rate,” the governor of Bank Indonesia, Darmin Nasution, said.

In addition to market intervention, Bank Indonesia said it will also redouble existing rupiah stabilisation measures, including the purchase of state securities on the secondary market, the introduction of foreign currency term deposits and the development of other domestic foreign exchange instruments.

“Bank Indonesia has determined that the direct impact of the crisis in Europe on the domestic corporate and banking sectors remains relatively limited,” the governor said.

The position of private foreign debt in Indonesia from Europe as of April 2012 stood at $21.6 billion, stemming from the Netherlands (57.3 per cent), England (10.7 per cent), Germany (6.4 per cent) and France (2.5 per cent). In addition, exposure to debt from PIIGS countries (Portugal, Ireland, Italy, Greece and Spain) is said to be  negligible. Likewise, domestic bank exposure to Europe is also relatively limited, Bank Indonesia said.

The impact of a deterioration in the European crisis will initially be felt on the forex market and financial market, for which there is already evidence and with growing intensity since the beginning of May, as reflected by exchange rate depreciation and falling stock price indexes in the Asian region, including Indonesia. Consequently, Bank Indonesia boosted the supply of forex liquidity to stabilise the rupiah, while simultaneously purchasing state securities on the secondary market. Foreign exchange reserves as of 31st May 2012 reached USD 111.5 billion, equivalent to 6.2 months of imports and foreign debt repayments.

“Hitherto, rupiah and foreign exchange liquidity has been maintained,” the governor said.

In addition to forex market intervention and in order boost the supply of foreign exchange domestically, Bank Indonesia recently also successfully held its first auction for foreign currency term deposits. Currently, a number of instruments to further the supply of foreign exchange as well as hedging instruments have been introduced.

The governor emphasised that “Bank Indonesia continues to follow up on measures to deepen the domestic foreign exchange market in order to reinforce rupiah exchange rate stability.”

Bank Indonesia also continues to strengthen policy coordination with the Government, including a follow-up to the memorandum of understanding signed on June 7, 2012, in order to create and maintain financial system stability. The MoU sets forth a mechanism and action plan for each respective institution as well as stipulating the coordination measures required.

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Reading Time: 2 minutes

Darmin Nasution, governor of Bank Indonesia

Although the Greek elections have given the global economic community renewed hope for a solution of the European debt crisis in the medium term, Southeast Asian countries remain wary and prepare for fiscal stabilisation measures.

Reading Time: 2 minutes

Darmin Nasution, governor of Bank Indonesia

Although the Greek elections have given the global economic community renewed hope for a solution of the European debt crisis in the medium term, Southeast Asian countries remain wary and prepare for fiscal stabilisation measures.

The central bank of Indonesia announced that it will continue to monitor the situation and prepare necessary anticipatory measures.

“We will boost the supply of foreign exchange on the market according to the requirement in order to stabilise the rupiah exchange rate,” the governor of Bank Indonesia, Darmin Nasution, said.

In addition to market intervention, Bank Indonesia said it will also redouble existing rupiah stabilisation measures, including the purchase of state securities on the secondary market, the introduction of foreign currency term deposits and the development of other domestic foreign exchange instruments.

“Bank Indonesia has determined that the direct impact of the crisis in Europe on the domestic corporate and banking sectors remains relatively limited,” the governor said.

The position of private foreign debt in Indonesia from Europe as of April 2012 stood at $21.6 billion, stemming from the Netherlands (57.3 per cent), England (10.7 per cent), Germany (6.4 per cent) and France (2.5 per cent). In addition, exposure to debt from PIIGS countries (Portugal, Ireland, Italy, Greece and Spain) is said to be  negligible. Likewise, domestic bank exposure to Europe is also relatively limited, Bank Indonesia said.

The impact of a deterioration in the European crisis will initially be felt on the forex market and financial market, for which there is already evidence and with growing intensity since the beginning of May, as reflected by exchange rate depreciation and falling stock price indexes in the Asian region, including Indonesia. Consequently, Bank Indonesia boosted the supply of forex liquidity to stabilise the rupiah, while simultaneously purchasing state securities on the secondary market. Foreign exchange reserves as of 31st May 2012 reached USD 111.5 billion, equivalent to 6.2 months of imports and foreign debt repayments.

“Hitherto, rupiah and foreign exchange liquidity has been maintained,” the governor said.

In addition to forex market intervention and in order boost the supply of foreign exchange domestically, Bank Indonesia recently also successfully held its first auction for foreign currency term deposits. Currently, a number of instruments to further the supply of foreign exchange as well as hedging instruments have been introduced.

The governor emphasised that “Bank Indonesia continues to follow up on measures to deepen the domestic foreign exchange market in order to reinforce rupiah exchange rate stability.”

Bank Indonesia also continues to strengthen policy coordination with the Government, including a follow-up to the memorandum of understanding signed on June 7, 2012, in order to create and maintain financial system stability. The MoU sets forth a mechanism and action plan for each respective institution as well as stipulating the coordination measures required.

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