Heat is on EM currencies with Indonesia stepping in

JAKARTA • From Indonesia to India, central banks in emerging markets (EMs) face rising pressure to prop up currencies battling a surging US dollar.

Indonesia’s central bank has intervened in the currency and bond markets by a “sizeable” amount, governor Agus Martowardojo said in a statement overnight. He pledged to take more action to support the rupiah after it slid to a two- year low on Monday.

“To maintain the stability of the rupiah exchange rate according to its fundamentals, Bank Indonesia (BI) has intervened in both the foreign exchange market” and the domestic bond market in “size- able quantities,” Martowardojo said from Washington, where he attended an International Monetary Fund meeting.

The latest action from Indonesia may be a harbinger for the rest of EMs in Asia, especially those running current-account deficits that get undermined with a rise in US yield.

The Philippine peso, Indian rupee and the rupiah are among the underperformers among developing economies globally this year.

“There could be some smoothing operations by other central banks,” said Sim Moh Siong, a currency strategist at Bank of Singapore Ltd. “So for markets, which are driven by flows like Indonesia, India, Malaysia, I imagine there would be some smoothing operations to prevent excessive volatility.”

The South Korean won led falls in emerging Asian currencies yesterday, heading for a third daily drop. The rupiah, which was little changed yesterday, has lost 2.4% against the US currency this year.

The Indian central bank would probably want to do the same thing, according to Charu Chanana, an economist at Continuum Economics in Singapore. “All central banks are ready to step in, in this adverse scenario. They all have enough reserves to tackle this kind of problem,” she said.

The Reserve Bank of India’s policy is to step in to curb excess volatility but not to manage the exchange rate.

“Currencies with more vulnerable external financing issues such as in India, Indonesia and the Philippines — the current-account deficit countries — are the ones that are most vulnerable to this widening in the yield gap as well as slowing in portfolio flows,” said Mitul Kotecha, senior strategist at TD Securities in Singapore.

Indonesia’s central bank has been stepping up efforts to boost the rupiah in recent weeks, publicly saying it intervened in the market. It has already tapped its foreign reserves to the tune of about US$6 billion (RM23.42 billion) in the past two months to defend the currency.

BI has “upped the ante in its currency jawboning more recently”, said Andy Ji, Asian currency strategist at Commonwealth Bank of Australia in Singapore. “However, market participants are simply questioning its credibility.”

Martowardojo said policymakers would continue to monitor and remain vigilant against risks including the impact of US interest-rate hikes, a potential trade war between the US and China, rising oil prices and escalation of geopolitical tensions.

BI deputy governor Dody Budi Waluyo called for calm and said there was no need for “panic”. BI and the government would “synergise” their efforts to protect the rupiah from deep deterioration, he said yesterday. — Bloomberg