Sell-off may drain US dollar supply in RI market

JAKARTA. Continued selling pressure on Indonesia’s financial assets may cause a US dollar shortage in the local market as demand exceeds supply, Bank Indonesia said. The Indonesian central bank has pledged, however, to continue adding US dollar supply to the market, officials have said.

Fears were renewed that a potential Greek eurozone exit and slowing economic growth in China, the world’s second largest economy, would stall global economic recovery, prompting investors to dump risky assets, possibly including many in Indonesia, and turn to safer instruments such as the US dollar.

“This spiked demand for US dollars. If the demand could previously meet the supply, in situations like this, the supply could be tight. In fact, the supply could be less than demand,” Bank Indonesia (BI) Governor Darmin Nasution told reporters last week.

The rupiah touched Rp 9,495 per US dollar early on Friday, its weakest level since December 2009, on global factors and rumors that BI will impose capital controls that could create a “liquidity shortage” in the market. The currency pared losses to Rp 9,371 during the day on BI’s intervention, deputy governor Hartadi A. Sarwono said.

“I affirm that there is no plan to impose capital controls. BI will continue to intervene in the forex [foreign exchange] market to supply the market,” Hartadi told The Jakarta Post.

The central bank reported $116.41 billion in foreign exchange reserves as of the end of April, which should be enough to address external shocks.

Foreign investors, who control more than half of the stocks traded on the local bourse, have dumped Rp 5.9 trillion (US$637.2 million) in shares and Rp 4.2 trillion in government bonds so far this month.

The benchmark Jakarta Composite Index (JCI) plunged 2.07 percent to 3,902 on the last trading day last week, the steepest drop in six months, compared with slight 0.7 percent drop and gains made in other regional markets.

Investors might take advantage of falling share prices after stocks sank last week, but risks remain high due to global economic uncertainties that could create volatility in the financial markets, analysts said.

“These types of sell-offs are opportunities because there is nothing the matter with Indonesia. There are a few things, but basically it’s a very good story,” said Mark Matthews, head of Asia research at Singapore-based private bank Julius Baer.

Indonesia’s economy, the largest in Southeast Asia, which has grown more than 6 percent since 2010 despite the global economic slowdown, would not be massively impacted by the eurozone debt crisis or China’s economic slowdown because of its strong domestic consumption, making it attractive for investors, he said.

“It is a place that is very tempting,” Matthews said.

Analysts and BI officials have said that selling pressures on Indonesia’s financial assets — rupiah, stocks, debt papers — will likely persist until the eurozone debt crisis and China’s economic slowdown have been resolved.

“We view volatility remaining on the table, albeit at a slower pace,” Kresna Securities research department wrote in a note distributed to clients. (Esther Samboh/ The Jakarta Post)