Jakarta: The International Monetary Fund (IMF) backed Indonesia’s response to a sell-off in its currency, saying higher interest rates and foreign exchange intervention were appropriate steps to help lessen the volatility.
Authorities can’t get too comfortable though, and should continue to reduce the risks that make the economy vulnerable to foreign outflows, according to Luis Breuer, IMF’s division chief for Indonesia.
“Overall, the policy reaction has been broadly appropriate but obviously things can change quickly and this calls for vigilance,” he said.
Southeast Asia’s biggest economy has been rattled by the emerging market rout, with the rupiah dropping to a two-decade low of almost 15,000 to the dollar this month. Bank Indonesia has been the most aggressive of the central banks in Asia, raising interest rates four times by a total of 1.25 percentage points and draining foreign reserves by almost 10 per cent this year.
At the same time, the government has taken steps to curb imports and rein in a current account deficit of 3 per cent of gross domestic product, a key reason cited for Indonesia’s risk to foreign outflows. “Now, we think the situation is manageable,” Breuer said. “But it requires vigilance and monitoring the situation very carefully and addressing those sorts of vulnerabilities that generate the contagion domestically from the external developments.”
He added the currency market intervention was “to avoid disorderly market conditions, not to try to anchor the exchange rate at a certain level,” which he said would be “a mistake.”
Authorities are trying everything they can to stabilise the currency, but central bank action has its limits, said the head of Indonesia’s investment board, Tom Lembong.
“We are taking every available measure within the paradigm of economic orthodoxy to respond to the market signals,” Lembong said.
There is a “limit to central bank action” and improving the fundamentals of the economy will be key, he said. “Our economy needs to internationalise more, it needs to integrate more into regional production chains, into regional trade and tourism and we are doing that.”
