MNI INSIGHT: Indonesia Builds Resilience Against 'Tantrum'

Indonesia's central bank expects currency pressure in 2022 as the U.S. Fed is likely to tighten, but MNI understands it has confidence in a more resilient balance sheet and national economy than in 2013 when it felt a hard impact of the U.S. 'taper tantrum' under less robust economic fundamentals.

Bank Indonesia points to the booming export sector and foreign inflows, record high foreign reserves of USD144 billion, a stable rupiah and benign inflation as signs that it is better placed than in 2013, see: MNI INSIGHT: Bank Indonesia Is Confident On Pandemic Recovery.

Currency stability and an inflation target of between 1% and 3% are BI's core mandates. In 2013, Indonesian inflation was at 8% and BI's reverse repo rate was at 7% compared with current inflation at 1.6% and official rates at 3.5%.

MNI understands that BI sees this as giving it some headroom to respond if there is pressure on the rupiah, which has held at around the 14,000 level to the USD for most of this year.

RATES STEADY THIS YEAR, BUT LIKELY UP NEXT

While BI Governor Perry Warjiyo has indicated that a rate rise is unlikely this year, MNI understands the next move in interest rates will be up, and could come with a tapering from BI itself as it slows the USD87 billion bond buying program it has used to support the economy during the pandemic.

The bond buying program, purchased direct from the government, will see BI hold around 40% of government debt while foreign bond holdings have declined to just over 20% compared to more than 30% in 2013. BI sees this as another line of defence against volatility.

Raising rates to support the currency would also help maintain the attractiveness of rupiah-denominated assets and relieve pressure on Indonesian corporates which have borrowed in USD.

In the meantime, MNI understands that BI's stance is to hold its policy settings steady and wait for economic recovery to gain momentum as pandemic restrictions ease.