Indonesia Rate Rise Signals No Current-Account Relief for Rupiah

Indonesia Rate Rise Signals No Current-Account Relief for Rupiah

Indonesia’s surprise interest-rate increase signals a wider-than-anticipated current account gap that threatens to deepen the rupiah’s three-week plunge, according to United Overseas Bank Ltd. and Barclays Plc. The rupiah, Asia’s worst performing currency this year, has tumbled 5.7 percent to 11,596 per dollar since trading at a seven-week high Oct. 25. In a move that was predicted by only one of 25 analysts surveyed by Bloomberg, Bank Indonesia raised the reference rate to a four-year high of 7.5 percent yesterday, a day before officials are slated to release third-quarter current account figures.“The main concern is how much the currency has weakened over a short span of time,” Ho Woei Chen, a Singapore-based economist at United Overseas Bank, the city-state’s third-largest lender, said in an interview yesterday. The rate increase indicates today’s figures will be “quite disappointing,” she said.

UOB says the rupiah will weaken to 11,700 per dollar by year-end. Barclays, (BARC) the most accurate rupiah forecaster over the past four quarters, says it will drop to 11,750.

Bank Indonesia, which has raised its policy rate by 1.75 percentage points in the past five months, said yesterday’s increase is aimed at narrowing the current-account gap. The shortfall will be as little as 3.7 percent of gross domestic product in the third quarter from a record 4.4 percent in the previous three months, it estimates. Foreign funds pulled $264 million from Indonesian stocks in November as the improving U.S. economic outlook spurred speculation the Federal Reserve will cut stimulus as soon as this year.

Deficit Predictions

BNP Paribas SA (BNP), the third most-accurate rupiah forecaster, sees the current-account deficit easing to $9.2 billion last quarter, compared with Bank Indonesia’s estimate for $8.4 billion and the all-time high of $9.8 billion in the previous three months. Barclays sees the broadest measure of trade narrowing to $7.7 billion before widening again in the fourth quarter. Only a shortfall of less than $5 billion would be positive for the currency, UOB’s Ho said.

The country unexpectedly posted a trade deficit in September, following a surplus the previous month, a government report showed Nov. 1.

Bank Indonesia has embarked on its most aggressive tightening cycle to address the balance-of-payments deficit since it introduced the reference rate in 2005.

“We think the relatively slow improvement of the current-account deficit in the third quarter helped shape the decision,” Helmi Arman, Jakarta-based economist at Citigroup Inc., the only analyst to have predicted the rate increase, wrote in a report yesterday. “The central bank, as a guardian of last resort for the current-account deficit, has demonstrated its stronger commitment to tackling this deficit.”

Reduce Imports

The rupiah’s current level is needed to reduce imports, Perry Warjiyo, deputy governor at the central bank, said Nov. 8, when the exchange rate was 11,410 per dollar. The currency at 9,400 to 9,500 is not suitable for a country with a current-account shortfall, Senior Deputy Governor Mirza Adityaswara said this week. The rupiah has fallen 17 percent this year, according to prices from local banks.

“The key thing is that the current account will narrow,” said Leo Rinaldy, a Jakarta-based economist at PT Mandiri Sekuritas, a unit of the nation’s largest lender by assets, which forecasts a third-quarter gap of 3.7 percent of GDP. “The rupiah is now more reflective of market forces and it will be helpful in fixing the external imbalance.”

Monetary tightening contributed to the nation’s growth slowing for a fifth straight quarter in the three months through September. The economy expanded 5.62 percent last quarter, the least since 2009, data showed this month.

“We believe the rate hike will provide near-term support to the rupiah, but it’s likely to be short-lived,” Prakriti Sofat, a Singapore-based economist at Barclays, said in an interview yesterday. The “increased credibility of the central bank is a positive for the currency, however fundamentals remain challenging,” she said.

To contact the reporter on this story: Yudith Ho in Jakarta at yho35@bloomberg.net

Indonesia Unexpectedly Raises Key Rate

By Novrida Manurung – Nov 12, 2013

Indonesia’s central bank unexpectedly raised its benchmark interest rate, stepping up its campaign to contain inflation (IDCPIY) and shore up the rupiah.

Governor Agus Martowardojo and his board increased the reference rate by 25 basis points to 7.5 percent, the central bank said in Jakarta today. Only one out of 25 economists surveyed by Bloomberg News predicted the move.

This is the fifth unexpected rate increase since Martowardojo took office in May, as he seeks to bolster the policy credibility of a nation that was among the worst hit in recent months as capital flowed out of emerging markets and the current-account deficit widened to a record. The rupiah, which has tumbled 16 percent since Federal Reserve Chairman Ben S. Bernanke raised the prospect in May of tapering bond purchases, pared declines after today’s announcement.

“The move is preemptive and they’re willing to live with lower growth, lower credit growth, lower import growth so long as the current account is at a more manageable magnitude,” said Chua Hak Bin, an economist at Bank of America Corp. in Singapore. “Nine months ago, there were some concerns that BI was behind the curve. They’re also acting to restore their credibility, to preempt further concerns.”

The rupiah was little changed at 11,600 per dollar as of 3:38 p.m. in Jakarta, after losing as much as 0.8 percent earlier, prices compiled by Bloomberg from local banks show. The currency is the worst performer this year among 11 major Asian currencies tracked by Bloomberg.

Policy Dilemma

Indonesian officials are grappling with a depreciated exchange rate, elevated inflation and diminished foreign capital inflows undermining President Susilo Bambang Yudhoyono’s legacy of economic stability before he steps down next year.

With today’s move, the central bank has raised its key rate by 1.75 percentage points since early June to shore up the rupiah and stem price gains. Inflation remained above 8 percent for a fourth month in October.

The current-account shortfall was 4.4 percent of GDP in the three months through June. Bank Indonesia will release the third-quarter figures tomorrow.

Narrowing the deficit is the number one priority for Indonesia, and the government is planning a policy package this month to help the balance of payments, Finance Minister Chatib Basri said Nov. 7.

Clear Objective

“Earlier in the year, we sensed that BI was tolerant of growing external imbalances as long as capital flows were still coming and deemed sufficient as a counterbalance,” said Helmi Arman, a Jakarta-based economist at Citigroup Inc. and the only analyst in the Bloomberg survey to predict the outcome. “Now BI has a clear objective of bringing down the current account deficit. Hence even though bond market capital flows recover, BI can tighten monetary policy if data outcomes do not point to a current-account deficit reduction that meets expectations.”

The central bank today also raised the deposit facility rate to 5.75 percent from 5.5 percent.

GDP increased 5.62 percent in the three months ended Sept. 30 from a year earlier, after climbing 5.83 percent in the second quarter, the government said Nov. 6. Bank Indonesia cut its 2013 economic growth forecast last month to between 5.5 percent and 5.9 percent, from as much as 6.2 percent earlier.

To contact the reporter on this story: Novrida Manurung in Jakarta at nmanurung@bloomberg.net

 

Indonesia Raises Interest Rates

Rupiah Has Been Hit Hard by Expectations of Fed Unwinding

FARIDA HUSNA

Nov. 12, 2013 3:45 a.m. ET

JAKARTA—Indonesia’s central bank raised its benchmark interest rate to the highest in four years, in a bid to shield the economy from expected market turbulence when the U.S. Federal Reserve begins to wind back its easy monetary policies.

Bank Indonesia’s decision Tuesday to raise its benchmark lending rate, by 0.25 percentage point to 7.5%, surprised most economists, who had expected authorities to keep rates on hold.

Indonesia’s currency and markets have been among the hardest hit globally by expectations the Fed will soon pull back on its $85-billion-a-month bond-buying program, a move that would send U.S. interest rates higher and lead to funds pulling back from emerging-market assets.

Expectations the Fed would move this summer sent currencies from Brazil to Turkey and India reeling. In the event, the Fed kept the program in place due to concerns over the U.S. economy. Many emerging-market assets recovered, including the Indian rupee, which is up 9% from early September.

But the Indonesian rupiah has remained flat since then, under pressure from investor concerns about the country’s current-account deficit, which means it remains reliant on short-term foreign funding for its bond and stock markets.

Bank Indonesia’s move was viewed as a sign the central bank is willing to slow the economy further to ensure the current-account deficit comes down and foreign investors keep their money in the country.

“It’s good to be pre-emptive. It’ll impress the markets,” said Taimur Baig, a Singapore-based economist with Deutsche Bank. DBK.XE -0.72%

Expectations are growing that the Fed could begin to pare its bond-buying as early as December, or early next year, after recent strong U.S. employment data.

The central bank’s move followed two rate rises in August and September that were meant to stabilize markets and reduce the current-account deficit, which hit 4.4% of gross domestic product in the second quarter—the biggest since the Asian financial crisis in the late 1990s. The bank has now raised rates by a percentage point since late August.

Economic data last week showed the economy grew by 5.6% in the third quarter from a year earlier—its slowest in almost four years, meaning the rate increases are unlikely to be popular with businesses.

The latest rate rise also will further help to get a handle on inflation. Consumer prices rose 8.32% in October from a year earlier.