Indonesia's drop in foreign reserves is hardly a surprise

Foreign reserves amounted to USD 105.3bn as of Aug15, USD 2.3bn lower than July. It is hardly surprising, as outflows from equities and IDgov bonds reached USD 1.3bn in August. With the fall in August, foreign reserves are now about USD 6.5bn lower compared to Dec14.

Interestingly, total foreign flows into equities and IDgov bonds still recorded a net positive of USD 4.7bn in the Jan-Aug period. The fall in foreign reserves looks relatively sharp against the backdrop of these inflows. One possible reason is intervention in the currency market. On Monday, Bank Indonesia (BI) reiterated its commitment to support the rupiah. It is clear that the central bank won't hesitate to intervene, given its view that the rupiah is currently undervalued.

Not only it has its inflationary impact, but excessive weakening of the rupiah has continued to drag on business confidence. The latest loan growth data is quite disconcerting. Loan growth has fallen below 10% as of July15, slowest since 2009. And investment loans have seen the sharpest plunge in the past year.

Not that BI will go against the market, especially since the weak rupiah story is pretty much a broad US dollar strength more than anything else. Arguably, BI has some room if it were to step up its aggression, as foreign reserve ratios still look pretty decent. As discussed last week, foreign reserves are still comfortably above 200% of short-term external debt and 8x of monthly import value. Confidence on the rupiah will get a much more powerful boost if the government can prevent GDP growth momentum to slide even further.