Jakarta – Bank Indonesia (BI) reported recently that its foreign exchange reserves rose by more than US$5 billion from February to the end of March, reaching US$145.2 billion, a level sufficient to cover 6.2 months of imports and debt payments, or twice the minimum required by international standards.
The central bank attributed the increase to several factors, including government overseas debt issuance, tax earnings from exports, inflows to bonds and the stock market and the higher deposit rates that BI offered to exporters who repatriated their export earnings. Most encouraging are the last three factors, notably the more than $1.3 billion net increase in foreign capital in Indonesia's debt and equity markets. All these indicate rosy macroeconomic prospects, stability and good synergy between monetary and fiscal authorities.
BI data shows Indonesia's trade surplus increased to $5.48 billion in February from $3.88 billion in January, and the country saw a net foreign capital inflow of $3 billion from January to mid-March despite global financial market uncertainty. Overall, the balance of payments outlook for 2023 is good, with a manageable current account within the range of GDP plus or minus 0.4 percent.
Meanwhile, the capital and financial account is expected to record a surplus, supported by foreign capital inflows in the form of direct and portfolio investment, in line with positive investor perceptions of the national economic outlook.
The central bank did not provide details on foreign debt issuance last month, but its data shows that the government's external debt continued its contraction, declining by 2.5 percent year-on-year to a total of $194.3 billion in January after falling 6.8 percent in December 2022.
BI's foreign exchange term deposits, launched in early March, provided incentives for exporters to place their proceeds in the domestic financial system with rates of between 4.64 and 4.92 percent for one- to six-month tenors, higher than the 4.12 to 4.68 percent offered by Singaporean banks. The policy has begun producing good results, and BI is continuing to hike rates to appeal to exporters, with one- and three-month deposits now yielding 4.87 percent and 5.09 percent, respectively. This is in line with regional trends, including in Singapore, whose banks are still hiking foreign exchange deposit rates despite stabilization in United States yields.
According to Bahana Securities, BI's latest auction of foreign exchange deposits to exporters on April 4 brought in $56.5 million, the highest placement of dollars in the four auctions that have been conducted. Of that total, exporters placed $26.5 million in three-month deposits, whereas previously, almost all bids went to one-month facilities. The analysts saw the relatively high dollar placement, implying foreign exchange conversion from exporters, as a pleasant surprise, given the strengthening of the rupiah to 14,889 against dollar two days earlier. The latest auction, on April 11, placed $12.5 million in one-month deposits and $6.8 million in six-month deposits. BI has held 11 auctions since the facility was introduced in early March, and this was the first time the longest-tenor instrument had attracted bids.
The narrowing yield spread between rupiah and dollar assets still seems attractive enough for investors to put their funds into government bonds, especially as most analysts have predicted that the Federal Reserve will ease its hawkish stance after the collapse of Silicon Valley Bank last month. The Fed raised rates last month by a quarter-point to a range of 4.75 to 5 percent, against the BI rate of 5.75 percent at present, and the US central bank is expected to make just one more rate increase in 2023.
We share BI's confidence that the 5.75 percent policy rate is sufficient to hold core inflation within the target range of 3 percent plus or minus 1 percent in the first half of 2023 and return consumer price index (CPI) inflation to the same range in the second half.
Moreover, the rupiah stabilization policy has been strengthened to control imported inflation and head off potential global financial market contagion.