Indonesia wins IMF backing for response to emerging market rout

The International Monetary Fund signage is seen outside the headquarters in Washington. (Reuters pic)

BALI: 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.”