May 26, 2023
JAKARTA – Bank Indonesia (BI) is bracing for the economic fallout of unresolved debt ceiling negotiations in the United States with measures aimed at keeping the rupiah stable while waiting to see whether a deal might result in US budget cuts.
Following its monthly monetary policy meeting on Thursday, BI Governor Perry Warjiyo elaborated that the move involved two toolsets, known as triple intervention and a twist operation.
“The focus is on strengthening rupiah exchange rate stabilization, so that low imported inflation remains low and the creeping effect of financial market uncertainty can be mitigated,” Perry said in a press conference.
Triple intervention consists of tools to influence the spot market, the domestic nondeliverable forward market and the bond market, all intended to keep the rupiah trading around a desired level against other currencies.
A twist operation, on the other hand, is a stabilization measure through selling short term bonds, of which BI holds some Rp 1.4 quadrillion (US$94 billion), to lift the yield of short-term bonds without pulling the gains on long-term bonds upward, thus attracting inflows and strengthening the rupiah.
The negotiation between the governing Democrats and the Republican-led House of Representatives in the US has been stalled for weeks, but it still widely expected to be concluded by early or mid-June. The longer the talks drag on, the more uncertainty they cause for markets.
“In a nutshell, the whole world is experiencing the impact of this debt ceiling negotiation. […] The dollar exchange rate strengthens while every other currency is under pressure,” said Perry.
Regardless, BI has kept its key interest rates unchanged for four months in a row as it expects the two sides in the US to find a middle ground eventually.
BI’s benchmark seven-day reverse repo rate remains at 5.75 percent following Thursday’s meeting, the level it reached in January after being raised by a cumulative 225 basis points (bps) beginning in August last year.
Perry explained that the central bank was paying close attention to the negotiations in the US. He said that should the US lift its debt ceiling, it would result in higher debt and higher treasury yields, which would in turn affect monetary policy considerations of the US Federal Reserve.
“Because if the ceiling is higher, expenditure, growth and inflation will be higher as well,” said Perry, before detailing that some were expecting a lifting of the ceiling to be followed by budget cuts.
BI was watching out for that scenario, under which the amount of debt would be lower, while the treasury yield would not rise as much, “possibly bringing down the [US benchmark] federal funds rate” from the current range of 5 to 5.25 percent.
“We believe that the federal funds rate has reached its peak. The possibility of it going up in June is not high. It will remain,” said Perry, explaining that it was most likely to remain high longer as US inflation had been coming down slowly.
Publicly listed Bank Permata chief economist Josua Pardede considered BI’s measures sufficient to mitigate the economic risk surrounding the US debt ceiling talks. He also told The Jakarta Post on Thursday that there was no need to change interest rates in response to the debt ceiling predicament for now, given the strong standing of the rupiah.
Read also: Asian stocks slide to two-month low on debt ceiling jitters
“So far, we are seeing that the rupiah year-to-date is still strong, especially when compared to other currencies,” said Josua, adding, “Yes, it is true that the rupiah experienced a month-to-date contraction, but it’s not that steep”.
Josua attributed the currency’s stability to Indonesia’s economic fundamentals, which had been posting positive on the metrics that mattered, such as inflation, trade and S&P Global’s purchasing managers’ index (PMI).
He noted that whether the Democrats or Republicans came out as winners in the debt ceiling tug of war did not affect Indonesia much, as what really mattered for the archipelago was for the talks to conclude as soon as possible, putting an end to the uncertainty caused.
Irman Faiz, macroeconomic analyst at public lender Bank Danamon, said global uncertainty remained high due to rather sticky US inflation and the debt ceiling issue.
“Our calculations show that BI still has space to maneuver should these risks materialize. Such a decision will depend heavily on the development of domestic inflation as well as pressure [on the rupiah] caused by the Fed’s policy stance,” he said.
Read also: Fitch puts US credit rating on negative watch as debt ceiling deadline looms
Ratings agency Fitch on Wednesday put the the US' credit on watch for a possible downgrade, raising the stakes as negotiations over the country's debt ceiling went down to the wire.
Fitch put the country's "AAA" rating, its highest rank, on a negative watch in a precursor to a possible downgrade should lawmakers fail to raise the amount that the Treasury can borrow before it runs out of money, the so-called X-date.