Record Outflows Test Bank Indonesia’s Fire-Fighting Skills
Record Outflows Test Bank Indonesia’s Fire-Fighting Skills
(Bloomberg) -- More than a year after it stemmed a free-fall in the rupiah, Bank Indonesia is in the limelight again.
Record outflows from Indonesian sovereign debt are testing the central bank’s fire-fighting skills as volatile crude prices and the coronavirus outbreak whipsaw the market. Yields have swung wildly in both directions in the past two weeks, tracking moves in global bonds.
As the rupiah hovers near a 10-month low, the authorities are weighing further action after deploying a reserve ratio cut and pledging fiscal stimulus to curb the swings. Indonesian bonds are a barometer of risk appetite and the central bank’s response is a showcase of how policy makers in Asia handle bursts of hot-money flows that can turn on a dime.
“The quick and well-communicated responses of Bank Indonesia recently seem to imply that they are still largely on top of the current situation,” said Yanxi Tan, a currency strategist at Malayan Banking Bhd. in Singapore. “In times of stress, closer policy coordination is definitely needed and in this context, it’s a good sign that Indonesia is firing on the fiscal cylinders as well.”
Global funds have pulled more than $2.8 billion from Indonesian bonds this year, the biggest ever outflow for the period and sending policy makers into high alert for further volatility. Authorities are mulling various measures to support markets, including the use of a bond stabilization framework, Finance Minister Sri Mulyani Indrawati said Tuesday.
The central bank has bought over 130 trillion rupiah ($9 billion) of bonds and boosted intervention in the spot currency and non-deliverable forwards markets. The stock exchange also stepped in, tightening trading-halt rules and banning short selling as local equities entered a bear market.
Bank Indonesia announced more debt purchases on Thursday after the government said it will waive income tax for individuals for six months to boost purchasing power amid the virus outbreak.
The rupiah plunged 1% on Thursday, hit by fears that the virus and a price war between oil producers could tilt the global economy into a recession. Yields soared 34 basis points on Monday in the biggest one-day jump since 2016.
Old Hand
For Southeast Asia’s largest economy, the sell-off isn’t exactly unchartered territory.
Back in 2018 when the rupiah tumbled to a 20-year low of of 15,284 per dollar, Bank Indonesia responded by raising the policy rate by 175 basis points that year and establishing a domestic non-deliverable forward market.
That put a floor under the currency. It strengthened almost 4% in 2019, benchmark yields fell from the highest in almost three years and implied volatility eased.
While that track record doesn’t guarantee continued success, there are signs that Bank Indonesia’s efforts are starting to bear fruit.
As expectations for the rupiah to weaken eased, currency hedging costs have dropped to around 10% from as high as 21% last week. This comes after the central bank said it’ll allow overseas investors to use proceeds from the sale of government bonds or stocks as an underlying asset in hedging their currency exposure.
External factors may also help. The environment is more favorable for Bank Indonesia than in 2018 as the Federal Reserve is expected to cut borrowing costs rather than hike them. Such expectations have driven down inflation-adjusted 10-year yields to minus 1.5% in the U.S., while those in Indonesia are 4.1%.
”Bank Indonesia, like central banks around the world, is facing levels of uncertainty which they have not seen since the global financial crisis,” said Khoon Goh, Singapore-based head of Asia research at Australia & New Zealand Banking Group Ltd. “It will continue to intervene to try and stabilize markets, and will be prepared to cut rates if needed to support the economy.”
To contact the reporters on this story: Masaki Kondo in Tokyo at mkondo3@bloomberg.net;Chester Yung in Singapore at kyung33@bloomberg.net
To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Liau Y-Sing
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