JAKARTA: The International Monetary Fund-backed Indonesia’s response to a selloff in its currency, saying higher interest rates and foreign-exchange intervention were appropriate steps to help lessen the volatility.
Authorities can’t get too comfortable though and should continue to reduce the risks that make the economy vulnerable to foreign outflows, according to Luis Breuer, the IMF’s division chief for Indonesia.
“Overall the policy reaction has been broadly appropriate but obviously things can change quickly and this calls for vigilance,” he said by phone from Washington.
Southeast Asia’s biggest economy has been rattled by the emerging market rout, with the rupiah dropping to a two-decade low of almost 15,000 to the dollar this month. Bank Indonesia has been the most aggressive of the central banks in Asia, raising interest rates four times by a total of 1.25 percentage points and draining foreign reserves by almost 10% this year.
At the same time, the government has taken steps to curb imports and rein in a current account deficit of 3%of gross domestic product, a key reason cited for Indonesia’s risk to foreign outflows.
“Now, we think the situation is manageable,” Breuer said. “But it requires vigilance and monitoring the situation very carefully and addressing those sorts of vulnerabilities that generate the contagion domestically from the external developments.”
He added the currency market intervention was “to avoid disorderly market conditions, not to try to anchor the exchange rate at a certain level,” which he said would be “a mistake.”
Authorities are trying everything they can to stabilize the currency, but central bank action has its limits, said Tom Lembong, head of Indonesia’s investment board.
“We are taking every available measure within the paradigm of economic orthodoxy to respond to the market signals,” he said in an interview with Bloomberg TV at the Milken Institute Asia Summit in Singapore on Friday. There is a “limit to central bank action” and improving the fundamentals of the economy will be key, he said.
“Our economy needs to internationalize more, it needs to integrate more into regional production chains, into regional trade and tourism and we are doing that,” he said.
In a new book titled ‘Realizing Indonesia’s Economic Potential,’ the IMF gave a positive assessment of the economy a month before the world’s financial elite gather on the tourist island of Bali for the IMF-World Bank’s annual meeting.
Still more reforms were needed to boost growth over the longer term. In particular, steps to improve “rigid” labour laws, opening up sectors to foreign investment and reducing the influence of state-owned companies in the economy, according to the IMF
The employment laws had contributed to a large informal labour market and a high number of workers being employed on short-term contracts, it said.
Nevertheless, Indonesia “when we look back and take a bird’s eye view has done remarkably well,” Breuer said. “It’s very clear the fundamentals of the Indonesian economy have changed dramatically in the last 20 years.”