Indonesia's Foreign Exchange Reserves Fell in June 2017
Since November 2016 we had seen six consecutive months of rising foreign exchange reserves in Indonesia. However, this trend ended in June 2017. The central bank of Indonesia (Bank Indonesia) announced on Friday (07/07) that the nation's foreign exchange assets fell to USD $123.09 billion last month, from USD $124.95 billion in May 2017 (which was an all-time record high level).
Bank Indonesia attributed this decline to sharply rising foreign currency demand by Indonesian banks in anticipation of the long Idul Fitri (Lebaran) holiday. Banks' foreign currency demand rose ahead of this long break to safeguard enough reserves. Therefore, this jump in foreign exchange demand should be of temporary nature only. Another reason that explains sliding foreign exchange assets is the issuance of euro-denominated state bonds (expected later this month). Last year, the government sold €3 billion worth of bonds. This year the target may be raised.
Moreover, Bank Indonesia said Indonesia's improving export performance, optimism surrounding the recent Standard & Poor's rating upgrade (to investment grade), and the relatively conducive conditions in global financial markets will further support the strengthening of reserve assets in the foreseeable future.
In a statement on the Bank Indonesia website, the lender of last resort noted that Indonesia's latest foreign exchange reserve position (USD $123.09 billion in June 2017) is able to finance 8.9 months of imports or 8.5 months of imports and servicing of government external debt repayments, which is well above the international standards of reserves adequacy at three months of imports.
The Institute for Development of Economics and Finance (Indef) stated that there remain several risks that could undermine the rising trend of Indonesia's foreign exchange reserves. These are (1) the unwinding of the Federal Reserve's balance sheet as well as the looming higher Fed Funds Rate, (2) the direction of US policy after the G-20 meeting in Hamburg (will the world's top economy remain focused on protectionism?), and (3) the direction of the crude oil price.
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