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While growing more optimistic about the economy, Bank Indonesia's concerns are beginning to focus on the danger that direct government financing under its quantitative easing programme could undermine international investor confidence and cause a run on the rupiah if it is allowed to continue for too long.
Although the special regulations authorising the past year's direct bond purchases were created specifically for the pandemic period, MNI understands BI is worried by the implications of the government's omnibus bill, currently before the national parliament. The bill includes provisions to bring BI under closer government control, which some officials at the central bank far might erode its independence and offer government an opportunity to expand the remit for direct bond-buying.
BI's worst case scenario is one where the rupiah is under severe pressure and international confidence in government finances has been undermined by direct QE.
While not an immediate issue, some worry that in a time of crisis the direct QE would undermine BI's mandate for rupiah stability and create a fresh financial crisis in South-East Asia's largest democracy, particularly if the central bank continues to hold large quantities of government debt.
OUTLOOK
The Bank has been more upbeat over the economic outlook in recent weeks, with GDP expected to grow at closer to 5% in 2021, but MNI understands officials continue to be concerned over any potential conflict conflict between growth and the rupiah.
The rise of the US dollar post-Fed has put some downward pressure on the rupiah, which hit IDR14,564 against the dollar, although it is still well shy of the IDR16,500 level hit in the early days of the pandemic and fairly close to the 3-year average of IDR14,386. Although BI sees this weakness as temporary, it remains prepared to intervene in the forex market to maintain the strength of the currency, which it still believes is undervalued.
At the same time, the central bank continues buying Government bonds on the primary market under Government regulations introduced to deal with the COVID-19 pandemic.
In 2020, Bank Indonesia injected USD57 billion into the economy through quantitative easing, easier commercial bank reserve requirements and foreign exchange stabilization. Of this, USD8 billion was from direct purchases of bonds, with an additional USD6 billion-worth purchased directly in 2021. It now holds more rupiah denominated bonds on its balance sheet than it does of government bonds in other currencies through its foreign reserves.
Indonesian Rupiah vs U.S. Dollar three-year view
Source: Bloomberg
Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.