Indonesia Vows to Restore Calm to Currency Market After Selloff

(Bloomberg) -- Indonesia pledged to restore stability in the country's financial market after a slump in the nation's currency to a more than two-year low last week sparked a selloff in stocks and bonds.

Bank Indonesia is open to adjusting interest rates if the pressure on rupiah persists and is considering boosting dollar supply through more forex swap auctions, Governor Agus Martowardojo told reporters after a meeting of the country's Financial System Stability Committee. The government will use the budget to support economic growth, though there is pressure coming from the weakening currency, Finance Minister Sri Mulyani Indrawati said.

Indonesia's rupiah is among Asia's worst performers in the past three months despite aggressive interventions by the nation's central bank as investors exited emerging markets amid higher U.S. Treasury yields and a stronger dollar. Bank Indonesia will possibly hike interest rate in the near term, but the timing will depend on data traffic next month, according to PT Bank Mandiri.

Bank Indonesia will push companies with dollar exposure to increase hedging and it will also strengthen its second line of defense to guard the rupiah, Martowardojo said.

The central bank has at least $60 billion in swap facilities under bilateral agreements with Japan, South Korea and Australia and the regional Chiang Mai Initiative Multilateralization Agreement, official data show. It can also tap into International Monetary Fund's credit line for crisis prevention.

Growth Forecast

The government is sticking to its forecast of 5.4 percent growth in gross domestic product this year, Indrawati said. The ministry will sustain growth momentum by extending economic assistance to low income groups, she told reporters.

The government's borrowing program to finance budget deficit faced no threat from the currency slump and front-loading of borrowing has ensured ample liquidity, Indrawati said.

Indonesia expects the fiscal deficit this year to decline to 2.19 percent of GDP from 2.5 percent last year. The government's gross borrowing may total 856.5 trillion rupiah this year with about 80 percent of it raised through the sale of bonds and sukuks in the local market.

--With assistance from Karlis Salna Rieka Rahadiana and Harry Suhartono

To contact the reporter on this story: Tassia Sipahutar in Jakarta at ssipahutar@bloomberg.net.

To contact the editors responsible for this story: Thomas Kutty Abraham at tabraham4@bloomberg.net, Karthikeyan Sundaram

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