Monday, March 2, 2020

Indonesia cuts FX requirement to boost liquidity

     Indonesia's central bank, one of nine central banks that have cut interest rates in response to the threat to economic growth from the spread of the coronavirus, undertook several measures to "maintain monetary and financial market stability as well as mitigate the COVID-19 risks:"
     Bank Indonesia (BI), which cut its benchmark interest rate on Feb. 20 by 25 basis points to 4.75 percent, said it would "intensify" its intervention policy to ensure the rupiah's exchange rate moved in line with its fundamentals, lower the reserve requirement for foreign exchange deposits, lower the rupiah reserve requirement by 50 basis points for banks financing export-import activities and expand the range of transactions available to foreign investors to provide alternative hedging instruments against their rupiah holdings.
     The reserve requirement for commercial banks' foreign exchange deposits will be lowered by 400 basis points to 4.0 percent as of March 16, boosting liquidity in the banking system by around US$3.2 billion and also ease any foreign exchange market pressures, BI said.
     The 50 basis point cut in rupiah reserve requirement for banks financing export-imports would take effect on April 1 for nine months before a further review.
     In November last year BI lowered the reserve requirement for banks' rupiah deposits by 50 basis points to 5.50 percent.
     Indonesia's rupiah has plunged since Feb. 19 but bounced back a bit today following BI's move.
     The rupiah was trading at 14,281 to the U.S. dollar today, down 2.5 percent this year.

     Bank Indonesia issued the following statement:

"Global financial market uncertainty due to the COVID-19 outbreak is escalating despite early signs of less intensity in China. The latest assessment conducted by Bank Indonesia shows that the spread of COVID-19 in China has begun to slow, thus inducing an uptick of economic activity in the country. Notwithstanding, financial market uncertainty continues to increase as more cases are detected outside China. Consequently, global investors are withdrawing funds from financial markets in developing countries in favour of safe-haven assets and commodities, such as UST bonds and gold. Such dynamics are amplifying international financial market pressures and have prompted intense broad-based depreciatory pressures on global currencies, including the Indonesian rupiah.
Bank Indonesia has strengthened policy coordination with the Government and other relevant authorities to stabilise the rupiah and contain the risks to the domestic economy associated with COVID-19. The Government has and will continue to expand room for fiscal stimuli, while ensuring ease of doing business in the real sector, including tourism as well as export-import activity, in order to sustain domestic economic growth momentum. Furthermore, Bank Indonesia is consistently maintaining monetary, rupiah and financial market stability, while building economic growth momentum. Additionally, the Indonesian Financial Services Authority (OJK) has also instituted policies to stabilise the stock market and strengthen banking industry resilience and other financial services.
At the monthly RDG meeting held on 19-20th February 2020, the BI Board of Governors agreed to implement a range of policies to mitigate the COVID-19 risks. The policy rate, BI 7-Day (Reverse) Repo Rate (BI7DRR), was lowered 25bps to 4.75%. Furthermore, Bank Indonesia continues to orient monetary operations towards maintaining adequate liquidity and supporting the transmission of an accommodative policy mix. Meanwhile, Bank Indonesia is adjusting the calculation of the Macroprudential Intermediation Ratio (MIR) by expanding the funding and financing purview for foreign bank branches towards further national economic advancement. In addition, Bank Indonesia will continue to strengthen payment system policy towards fostering economic growth through the expansion of QRIS (Quick Response Code Indonesian Standard) acceptance and electronification of social aid program (bansos) disbursements and local government financial transactions.
To strengthen coordination and the various policy measures already taken, Bank Indonesia today introduced a variety of five follow-up policy measures to maintain monetary and financial market stability as well as mitigate the COVID-19 risks as follows:
  1. Intensify triple intervention policy to ensure rupiah exchange rates move in line with the currency's fundamental value and market mechanisms. To that end, Bank Indonesia will optimise its intervention strategy in the DNDF market, spot market and SBN market in order to minimise the risk of increasing rupiah exchange rate volatility.
  2. Lower the FX reserve requirements for commercial banks from 8% to 4%, effective 16th March 2020, which will increase FX liquidity in the banking industry by around USD3.2 billion and simultaneously alleviate foreign exchange market pressures.
  3. Lower the rupiah reserve requirements by 50bps for banks financing export-import activity in coordination with the Government. Effective from 1st April 2020 for a period of nine months before a further review, this policy is expected to facilitate export-import activity through lower costs/fees.
  4. Expand the range of underlying transactions available to foreign investors in order to provide alternative hedging instruments against rupiah holdings.
  5. Reaffirm that global investors can utilise global and domestic custodian banks to conduct investment activity in Indonesia.

Moving forward, Bank Indonesia will continue to rigorously monitor financial market and economic developments, including the impact of COVID-19, while strengthening the policy mix and coordination with the Government and other relevant authorities to maintain economic stability, build economic growth momentum and accelerate structural reforms."


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