(Bloomberg) -- Bank Indonesia has a $22 billion buffer for defending the rupiah before alarm bells ring about its foreign reserves, according to Bank of America Merrill Lynch.
Foreign reserves would need to drop to $110 billion, from the $124.9 billion recorded at the end of April, to signal an “aggressive and persistent depletion,” said Singapore-based strategist Rohit Garg. That's unlikely to happen based on recent history, he said. On top of that, Bank Indonesia closed its forward books recently, giving it another $7 billion, he said.
“History suggests that no matter how violent the selloff has been, even if it's 2013 or 2015, the outflows have never been really all that aggressive,” Garg said. “We are seeing stress right now in the rupiah and the bonds, but Indonesia's buffers are still very, very good.”
The emerging market slump triggered last month by benchmark Treasury yields touching a four-year high is drawing comparisons with the 2013 taper tantrum, and dividing investors over the extent of the selldown. Analysts, including those at Goldman Sachs Group Inc., are increasingly predicting that Bank Indonesia will raise rates to defend a currency that has dropped to a 2015 low.
The rupiah has weakened 2.3 percent against the dollar this quarter and fell below the psychological 14,000 level on Monday. Bank Indonesia is preparing monetary measures, including adjusting its policy rate, to stabilize its markets, Governor Agus Martowardojo said Wednesday.
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Global funds have sold a net $2.7 billion of Indonesian equities this year. They dumped $1.5 billion worth of bonds in the second quarter, paring the net inflow for 2018 to $202 million.
“Now that foreigners are not buying bonds, that's going to create a wider supply-demand gap,” said Garg. Demand from local pension funds and insurance companies will probably pick up in coming weeks and fill the gap given the higher yields, he said.
To contact the reporter on this story: Ruth Carson in Sydney at rliew6@bloomberg.net.
To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Cormac Mullen
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