Indonesia Cuts Reserve Ratios to Boost Liquidity as Rupiah Falls

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Bank Indonesia lowered lenders' reserve requirement ratios, seeking to shore up liquidity after concerns over the economic impact of coronavirus triggered a selloff in the nation's stocks, bonds and currency.

The foreign exchange reserve requirement ratio for banks will be cut to 4%, from 8% previously, Bank Indonesia Governor Perry Warjiyo told reporters Monday. The cut, which is expected to add $3.2 billion in additional liquidity, is effective from March 16, he said.

Reserve requirement ratios for banks engaged in trade financing will be lowered by 50 basis points from April 1, for a period of nine months, Warjiyo said. The move is aimed at lowering costs for banks engaged in financing imports and exports, Bank Indonesia said in a statement.

The monetary authority also pledged to intensify its “triple market intervention” to stabilize the currency and bonds, and said it will continue to coordinate with the government and relevant authorities to maintain economic stability, support growth and accelerate reforms.

The latest measures add to a 25-basis-point cut in the key interest rate on Feb. 20 and about $750 million in fiscal stimulus, announced last week by Finance Minister Sri Mulyani Indrawati, to help sectors hit by the coronavirus outbreak. Indonesia reported its first confirmed cases of the virus Monday.

While Bank Indonesia's intervention to support rupiah and bond yields, including daily reverse-auctions over the past few days, was focused on resolving the demand-side problem for dollars, the latest measures may help boost supply of the U.S. currency, Satria Sambijantoro, an economist at PT Bahana Sekuritas in Jakarta wrote in a note.

“The measures could be effective to stabilize rupiah from the supply-side of dollars and anchor the thin domestic foreign exchange market,” Sambijantoro said.

Rupiah Rallies

The rupiah erased losses of as much as 0.6% after the announcement of the RRR cut to close 0.4% higher at 14,265 to the dollar. The currency slumped 4.6% last month to end as the worst performer in Asia. Yield on the 10-year government bond pared gains after rallying to its highest level since Jan. 8.

Foreign investors have been net sellers of more than $2 billion of Indonesian bonds and stocks in February. The outflows have also pushed the nation's benchmark stock index to the brink of a bear market, prompting the stock exchange to ban short-selling of securities to stem ease volatility.

Other measures announced by the central bank include:

• Foreign investors allowed to use rupiah raised from sale of government bonds or stocks as an underlying in hedging their forex exposure
• Global investors urged to use foreign and domestic banks as custodians in their investment activities in Indonesia

To contact the reporter on this story: Arys Aditya in Jakarta at aaditya5@bloomberg.net

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, ;Thomas Kutty Abraham at tabraham4@bloomberg.net, Michael S. Arnold

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