Indonesia’s new forex law

Indonesia’s central bank said its new rule shortening hedging duration to a minimum of one week is now effective, and expects it to help stabilise the rupiah that is pressured by a growing current account deficit.

Foreign investors could previously only hedge forward transactions for a minimum of three months, which contributed to recent rupiah volatility as they shifted to safer instruments amid an uncertain global economy.

The rule is part of moves announced by Bank Indonesia last week to reduce volatility in the rupiah and lower the current account deficit, which reached a record high of $6.94bil in the second quarter.

“This will help stabilise the rupiah and won’t much affect the current account deficit,” central bank governor Darmin Nasution told reporters yesterday.

The central bank has forecast the current account deficit to improve to 2.2 percent of gross domestic product (GDP) in the second half of this year. Last quarter, the deficit was 3.1 percent of GDP.

A current account deficit is rare for Indonesia which usually sees a trade surplus. But falling exports caused by lower commodity prices and growing imports due to strong domestic demand have resulted in trade deficits for three straight months to June.

Nasution said faster economic expansion could lead to a bigger current account deficit. The central bank has hinted it will take measures to avoid credit bubbles such as by imposing minimum downpayments for loans provided by the syariah industry.

Indonesia’s economy surprisingly grew by 6.4 percent last quarter due to strong investment and domestic demand, above a consensus of 6.1 percent. Bank Indonesia expects the economy to expand 6.1 percent to 6.5 percent this year.

http://biz.thestar.com.my/news/story.asp?file=/2012/8/17/business/11872293&sec=business

 

Category: Indonesia