Aloysius Unditu & Ririn Radiawati Kusuma – Massive intervention by Bank Indonesia has cost the country billions of dollars from its foreign exchange reserves over the last month to defend the country's capital markets.
The costly effort helped to stabilize the rupiah, bonds and stocks. But Indonesia's foreign reserves fell 8 percent to $114.5 billion at the end of September from $124.6 billion a month earlier, data from Bank Indonesia showed on Friday.
The central bank declined to say exactly how much of its reserves were used to defend the rupiah. Reserves also tend to decline as international investors withdraw their assets in exchange for dollars.
Overseas investors have been unloading assets in emerging markets, including Indonesia, over fears the euro zone debt crisis will worsen and the US economic malaise will continue.
That prompted several policy makers in Indonesia and other nations across Asia, including South Korea, India, Thailand and Malaysia, to intervene to stabilize their markets.
Hartadi A. Sarwono, a deputy governor of Bank Indonesia, said the central bank had to intervene in the foreign-exchange market to defend the rupiah. On Sept. 23 alone, Bank Indonesia reportedly spent up to $200 million to intervene in the currency market.
"When there is a panic sell-off, we intervene in the market in a massive manner. We have to step in, so that's why our reserves declined," Hartadi said. "That's enough to win the confidence of the market."
He said the government was on guard to prevent the rupiah from further depreciation as a result of panic selling. The fundamentals of the economy, he added, remain solid.
Hatta Rajasa, the chief economics minister, also said there was no need for concern over the lower foreign exchange reserve. He said what was left was more than enough to help the country withstand any economic shocks.
The minister pointed out that the reserves were still much higher than when the 1998 and 2008 financial crises hit. In September 2008, reserves stood at $57 billion. Hartadi described Indonesia's current reserves of $114.5 billion as healthy.
Helmi Arman, an economist and currency strategist at Citigroup in Jakarta, said the latest reserves were enough to cover more than six months of imports and short debt payments.
Wiling Bolung, head of treasury at ANZ Panin Bank in Jakarta, praised the central bank's prudent defense of the rupiah as the "proper move". "Bank Indonesia has been cautious on that front, they used the reserve to defend the market," Wiling said.
The rupiah, which was the best-performing currency in the region last year, weakened 4.9 percent in September. It traded at 8,950 against the dollar at the end of the month from 8,534 at the end of August. On Friday, the rupiah weakened 0.5 percent to 8,968 from Thursday's close at 8,925.
Hartadi said the rupiah was expected to strengthen in the coming months as foreign investors returned to the nation's capital markets.
Eugene Leow, an economist at DBS Group Research in Singapore, said he expected the central bank's foreign reserves to build up at a slow pace because Indonesia's current-account surplus was likely to narrow as import growth outpaced exports.