BI Not Likely to Lower Cap for Short Term Foreign Liability

Padangekspres.net-Indonesia's central bank is not likely to lower the ceiling for commercial banks' short term liability anytime soon as part of its efforts to mitigate fund reversal risks, officials said Thursday.

Like many emerging countries, Indonesia has seen massive fund inflows seeking higher gains amid low interest rate policies in the developed nations, leading to a monetary dilemma as raising its rates would attract further potentially destabilizing funds.

Bank Indonesia, since the middle of last year, has introduced a slew of measures to curb hot money flows, such as increasing reserve requirements for commercial lenders, slapped a minimum holding period for its SBI notes, and reinstated a cap on short-term foreign borrowings at 30% of commercial banks' capital.

Bank Indonesia Deputy Governor Hartadi Sarwono told Dow Jones Newswires via a text message: “no changes yet“ for the short term foreign borrowings ruling, rebuffing market chatter that the central bank could soon lower the ceiling for such liability to 10% of lenders' capital.

Separately, Difi Johansyah, a spokesman at the central bank, told Dow Jones Newswires that such short-term liabilities have declined to $4.9 billion in April from $7.2 billion at the end of 2010.

“There was a market chatter that the cap could be lowered to 10% of capital, but there hasn't been any decision on that. We're always studying possible measures to ensure financial stability, including mitigating potential fund reversals,“ Johansyah said.

Johansyah also said the study over short term foreign borrowing was still “in early phase.“ People familiar with the matter said that the study was “one of many“ to prepare policy makers for “various alternatives and game plan“ in the wake of potential fund reversals. The people didn't detail other studies which being conducted by the central bank.

In a bid to safeguard against possible fund reversals, Bank Indonesia has been increasing its foreign exchange reserves as its first line of defense and leaning more towards currency appreciation to combat inflation than raising interest rates.

Its forex reserves have continuously breached record highs in recent months--$118.1 billion at the end of May--while the stronger Indonesian rupiah has provided elbow room to delay tightening monetary policy. The bank has raised its policy rate by 25 basis points only once in that time, in February. That was the first rate increase since August 2009.

“Within Asia, Indonesia saw the sharpest improvement in FX reserve ratios since pre-Lehman 2007 levels after Taiwan and the Philippines,“ Citigroup said in a research paper on Thursday, adding “official FX reserves in the last year grew about 20% faster than the rise in external debt.“

“FX reserve accumulation in the last year has been healthier than in the previous 14-months period post-Lehman recovery, when almost two-thirds of FX reserve increase can be accounted for by portfolio fixed income inflows. If we assume an external shock...a sharp drop in foreign holdings of bonds and equities similar to what happened post-Lehman, Indonesia's FX reserve coverage is still comfortable at almost 1.3 times, a significant improvement from a year ago when the ratio was below 1 time,“ Citigroup added.

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