BI Keeps Financial Market Attractive
Bank Indonesia and the government have continued to try to reduce the current account deficit and to maintain the attractiveness of the financial market. An increase in BI\'s benchmark interest rate will be followed by a rise in the lending rates of the domestic bank.
JAKARTA, KOMPAS – Efforts to reduce the current account deficit, maintain the attractiveness of the financial market and deepen the foreign exchange market are continuing.
Bank Indonesia (BI), for example, raised its benchmark rate and offered non-deliverable rupiah forward contracts (DNDF) to cope with global uncertainties.
During a board of governors meeting from Sept. 26 to 27 in Jakarta, BI decided to raise its benchmark interest rate by another 25 basis points (bps), a 0.25 percent increase to 5.75 percent. Thus, the central bank has raised its benchmark interest rate by 1.5 percent since May 2018.
The interest rates of the central bank’s rupiah deposit facility and rupiah lending facility were raised again by 0.25 percent to 5 percent and 6 percent, respectively.
The DNDF facility was introduced to deepen the foreign exchange market and to give an alternative protection instrument to banks and corporations. The DNDF is a forward contract for hedging purposes and is settled in rupiah in the forex market, based on the Jakarta Interbank Spot Dollar Rate (JISDOR) for the US dollar and the BI middle rate for non-US currencies.
BI Governor Perry Warjiyo said in Jakarta on Thursday that the benchmark interest rate was increased as a response to a rise in the benchmark rate of the central bank of the United States, the Federal Reserve. The Fed’s Federal Open Market Committee (FOMC) raised its benchmark rate, the Fed Fund rate, by 25 basis points to 2 to 2.25 percent during its meeting on Sept. 25 to 26.
BI’s benchmark rate was raised to help lower the current transaction deficit, which reached 3.04 percent of the gross domestic product (GDP) in the second quarter this year. The reference rate of 5.75 percent is also expected to maintain the attractiveness of the domestic financial market so as to strengthen Indonesia\'s resilience amid an escalation of global uncertainties.
"It is believed that the concrete steps of the central bank and the government in trying to boost exports and lower imports will have a positive impact in reducing the current account deficit to 2.5 percent of the GDP in 2019," Perry said.
Indonesia has booked a current account deficit since the fourth quarter of 2011. However, based on a year-on-year calculation, the current account deficit has been ongoing sincec 2012. This year, BI estimates that the current account deficit will reach 3 percent of the GDP. The Asian Development Bank (ADB) estimates Indonesia\'s current transaction deficit to reach 2.6 percent of the GDP at the end of this year.
With the increase in BI\'s benchmark interest, lenders have no choice but to increase lending rates.
"Since last year we have raised lending rates by 175 basis points. With the increase in BI\'s benchmark interest rate, we have to make another adjustment in lending rates even though it will put borrowers in a difficult position," said Lani Darmawan, the director of PT Bank CIMB Niaga.
Mahelan Prabanta Rikso, the director of risk, strategy and compliance at PT Bank Tabungan Negara, said the increase in lending rates could not be avoided as banks had to raise their deposit rates following the increase in BI\'s benchmark interest rate. BTN has raised deposit rates by 50 bps. BTN has also gradually raised lending rates, by 25 to 50 bps.
The chairman of the Association of Indonesian Food and Beverage Producers, Adhi S. Lukman, said the increase in the interest rates would further make the business climate more unfavorable, as the rate hike would add an additional financial burden to entrepreneurs, who have been affected by the weakening of the rupiah against the US dollar.
Perry said the introduction of the DNDF facility was part of efforts to deepen the forex market and provide alternative hedging instruments. DNDF transactions can be carried out by banks with customers and foreign parties in order to hedge the risk of the rupiah exchange rate.
BI senior deputy governor Mirza Adityaswara said the DNDF facility was offered to importers and corporations that had foreign debts as an alternative to meet their dollar needs amid volatility in the rupiah exchange rate. At present, they get US dollars in non-deliverable forward (NDF) cash transactions abroad with uncertain exchange rates.
"With the DNDF, there will be diversification in the forex market. Those who cannot use the NDF cash market abroad can enter the DNDF market. Meanwhile, those who have been in the NDF cash market overseas can also hedge through the DNDF market," he said.
Bank UOB Indonesia’s chief economist, Enrico Tanuwidjaja said the DNDF would further deepen, providing more alternatives in the Indonesian financial market instrument.
The fixing of the JISDOR rate at the opening of trading in the forex market is currently heavily influenced by foreign NDFs. The DNDF facility is also expected to gradually affect the JISDOR rate.
So far, the NDF facility is offered in major global financial centers, such as New York, London, Hong Kong and Singapore. However, as they are traded abroad, NDFs are often considered to be less reflective of domestic conditions.
The government hopes the increase in the Fed\'s benchmark interest rate will not further increase the volatility of the domestic financial market. The resilience of the domestic economy can be strengthened by managing the state budget more prudently, establishing positive and optimistic market perceptions, and introducing a consistent policy mix.
Finance Minister Sri Mulani Indrawati said that, thus far, Indonesia\'s economic fundamentals were strong enough because of the sound management of the state budget. The government also consistently indicates that there is improvement in the national economy, which is key in order to maintain business confidence. Indonesia\'s economic policy must be flexible in order to be able to respond to the global changes.
"Change must occur. However, we try to adjust to the changes but the adjustment should not be made drastically so as to disrupt all national economic activities," he said.
Coordinating Economic Minister Darmin Nasution said the government and BI would be ready to respond to global changes. So far, the Fed\'s policy patterns and the dynamics of the US economy have become more predictable, meaning policy responses can be better prepared. The changes of US economic condition are being closely monitored by businesses and banks.