Indonesia’s international reserves amounted to IDR97.00 billion as of October 2013, having recuperated after hitting a recent low of USD92.67 billion during July 2013; its international reserves stood at IDR107.26 billion during April 2013. International reserves plateaued during September 2013 before rising marginally during October as depreciation pressures eased and Bank Indonesia (the central bank) reduced its foreign exchange intervention. The brief respite during September 2013 coincided with the US Federal Reserve’s (Fed’s) indication that it will not be scaling back its asset repurchase (“tapering”) programme, which has given some leeway to Bank Indonesia to reduce its foreign exchange intervention aimed at supporting the currency, the rupiah.

Previously, depreciation pressures arising from persistent current account deficits and capital outflows during mid-2013 obliged Bank Indonesia to dig into its reserves to stabilise the rupiah amid excessive exchange rate volatility. Indeed, Indonesia’s declining international reserves corresponded to sharper depreciation pressures observed during the period where the rupiah slid from IDR9,722/USD in April 2013 to IDR10,278/USD in July before peaking at IDR11,613/USD in September. The scale of intervention required at the height of this recent exchange rate volatility prompted Bank Indonesia to reconsider its stance as it weighed up the costs of intervention against accepting a greater degree of currency volatility.

The recovery in Indonesia’s international reserves, which began in August 2013, but was more evident during September, has led to improvements in its overall adequacy ratios. Measured against its imports (on a 12-month rolling average basis), Indonesia currently holds international reserves equivalent to 6.04 months of imports, relative to its trough of 5.83 months during July 2013, but is still substantially below the 7.06 months multiple observed during January 2013 or its peak of 7.89 months during August 2012. Meanwhile, a combination of deteriorating international reserves during early-to-mid 2013 and the increased accumulation of short term external debt have increased the ratio of short term external debt to international reserves to 61.38% as of September 2013, compared to 44.17% during September 2012. However, despite the heightened risk from rising short term external debt to international reserves ratio, Indonesia’s external indebtedness remains largely within safe level of adequacy parameters given fluctuations in short-term financial flows.

Despite the postponement of the Fed’s plan to taper its asset repurchase programme, a sporadic recovery in the United States has increased speculation that the Fed may gradually taper around early-2014. Sharp depreciation of the rupiah, despite aggressive forex market intervention, suggests that Bank Indonesia may well consider other options for stabilising the currency in the event of similar depreciation pressures. Indeed, Bank Indonesia has negotiated several bilateral foreign exchange swap lines with some of its major central bank counterparts in East Asia and directly with the ASEAN organisation. This includes bilateral swap lines with Japan and China worth USD12 billion and USD15 billion respectively, along with a swap agreement with South Korea amounting to USD10 billion. However, given the tough conditions usually attached to these arrangements, these funds are typically only available when specific variables have deteriorated beyond certain threshold levels. It is suggested that these arrangements are largely created to alleviate short term fears and invoke investor confidence.