Indonesia’s savvy economic management means it is well positioned to weather the triple threat of rising rates, rising inflation and the depreciation of the rupiah against the dollar. But market experts warned that a careful balancing act is needed to retain that momentum.
The southeast Asian country has followed a three-pronged approach to its funding.
This includes tapping bond investors, both international and retail, leveraging its strong relationship with multilaterals to get funding support and putting in place a three-year debt monetisation exercise ending in 2022 whereby the central bank buys the government’s bonds in the primary market.
As a result, Indonesia boasted a current account surplus for the first time in 10 years in 2021, which it has managed to maintain this year. For the second quarter this year, Bank Indonesia said it had a current account surplus of $3.9bn, or roughly 1.1% of GDP.
With the US Federal Reserve going on a rate hike spree this year — and making funding costs more expensive — Indonesia now has the option to lower its debt issuance thanks to its cash surplus.
“This is partly by design, as when we entered 2022, we thought the year will be challenging, so we put aside some surplus from 2021 to be used as a buffer this year,” Luky Alfirman, director general of budget financing and risk management at Indonesia’s ministry of finance, told GlobalMarkets in an exclusive interview. “This was a very useful strategy as it helped us navigate our issuance in this very volatile, challenging period.”
GROWTH/INFLATION BALANCE
However, the country’s economic and growth success will come down, to a large extent, on how well the central bank is able to manage a falling rupiah, growing inflation and a higher interest rate environment.
Anushka Shah, a senior credit officer at Moody’s in Singapore, said it has been clear that policymakers, including in Indonesia, have been intervening in the currency market and using their foreign exchange reserves to stem the slide in their currencies, even if their moves have not “created a big dent” in their overall FX reserves.
“But this underscores the complications or the delicate tasks central banks are facing in balancing currency depreciation and inflationary pressures with a tentative growth recovery,” said Shah.