Last month’s drop in Bank Indonesia’s foreign-exchange reserves, even as the rupiah led emerging markets to surge 7 percent, highlights vulnerability in the nation’s increase in US borrowing costs.
Falling for its eight month, from US$1 billion to US$100.7 billion, Indonesia’s central bank stockpile figures were released last week. The monetary authority said in a statement that the decline was due to rising costs to service the government’s foreign debt and the use of reserves to stabilize the rupiah, which suggests Bank Indonesia intervened to help its currency hold onto gains after it jumped 9.1 percent in the week through 9 October.
At the lowest level since January 2014, reserves are near the US$100 billion level, often cited as a key psychological threshold, reducing the central bank’s buffer for when the Federal Reserve raises interest rates. Futures contracts show the odds of this happening in 2015 has risen to 70 percent, after US jobs data released last week boosted the case for an increase. According to an estimate from Macquarie Bank Ltd., net outflows of US$1.7 billion came from the Indonesian economy in October.
According to median estimates from Bloomberg surveys, the currency will weaken to Rp.14,034 by the end 2015 and to Rp.14,500 by mid-2016. The rupiah fell 0.6 percent to Rp.13,650 a dollar at the close in Jakarta after dropping as much as 1.2 percent earlier, according to prices from local banks. Since its intraday peak in October of Rp.13,228, it has lost 3.1 percent.
The rupiah’s rally in October was aided by overseas funds unwinding hedges to take advantage of the reduced cost of protecting their currency exposure, said Nizam Idris, head of currencies and fixed-income strategy at Macquarie in Singapore. Data compiled by Bloomberg shows that the rupiah’s one-month onshore implied yield, a gauge of expected interest rates and fluctuations used to price forwards that are used to hedge against exchange-rate losses, was 9.6 percent on 2 November, down from 15.98 on 30 September.
“Hedging needs might come back so that would put pressure on the rupiah to weaken,” Idris said. “The pressure on the currency isn’t over.”