Indonesia intervenes to support rupiah as rate decision looms

BANK INDONESIA / BI - JAKARTA. Indonesia's central bank intervened again in the currency market to support the rupiah, as analysts predicted a close call on whether interest rates will be raised at a policy meeting later on Wednesday amid a deepening emerging market sell-off.

The rupiah hit a low on Wednesday of 14,646 per dollar, the weakest level since October 2015. Yield of the 10-year benchmark government bond stayed near the highest since December 2016, while the main stock index continued to fall.

And at a time of concern about the widening current account deficit, Indonesia reported a July trade deficit of $2 billion, the biggest in five years and more than triple what economists forecast.

Nanang Hendarsah, Bank Indonesia's (BI) head of monetary management, said BI "is in the market" to defend the rupiah.

BI has spent billions of dollars to support the currency. Foreign exchange reserves declined $13.7 billion from February through July.

The latest intervention came hours ahead of a BI Governor Perry Warjiyo's announcement of a rate decision at the August policy meeting. BI hiked the benchmark interest rate by 100 basis points between mid-May and the end of June to help the rupiah.

Twelve out of 19 analysts surveyed by Reuters expect BI to hold the rate at 5.25 percent, while the rest see a 25-basis point hike. Five analysts initially pencilled in a hold, but switched to a hike after this week's market rout.

Hendarsah said BI would again hold a foreign exchange swap auction on Wednesday to reduce currency hedging costs.

Warjiyo had said on Tuesday the morning swap auctions would help with liquidity management at commercial banks and lines would be opened in the afternoon for banks to reswap any contract they offer to corporate clients in U.S. dollars, euro, yen and yuan.

Prodding Exporting

These measures appear aimed at prodding exporters to release dollar earnings to the market, with a foreign exchange trader in Jakarta noting BI was the sole supplier of dollars in the onshore market.

"Exporters are not selling their dollars and there are no inflows from investors," the trader said.

The government on Tuesday announced a series of "strict corrective" measures in a bid to ease some pressures on the rupiah. Finance Minister Sri Mulyani Indrawati said there will be a 7.5 percent import tax on about 500 consumer goods that Indonesia can produce locally. She didn't identify the products.

Also, state energy companies will be asked to use more locally-made goods for their projects and delay those that require large imports, she said.

At Tuesday's cabinet meeting, President Joko Widodo, who is seeking re-election next year, urged ministers to make "real progress" to reduce the current account deficit.

A surge in imports was one of the main reasons Indonesia's current account deficit in April-June swelled to the biggest in nearly four years, equivalent to 3 percent of GDP.

The value of July's imports was an all-time high, although the composition mainly consisted of raw materials and capital goods.