Indonesian Foreign Reserves Expected to Plunge

The foreign exchange reserves of Indonesia are expected to tumble the most since this quarter’s Asian financial crisis. Thereby, the President Susilo Bambang Yudhoyono is under immense pressure to curb imports and cut the fuel subsidies. By end of March, the reserves of Indonesia are expected to fall to $2 billion, as far as estimates of PT Bank Danamon Indonesia, Barclays Plc and PT Bank Central Asia are concerned. Incidentally, the foreign reserve of Indonesia experienced a drop of $7.6 billion in the initial 2 months of this year marking its largest since 1998. Yudhoyono has already announced that the changes to the fuel subsidy policy may soon be worked out.

Indonesian Government has not really been able to curb demand for the oil imports and it contributed to a record trade deficit in last October. Not only that, but, the major currency of Indonesia, Indonesian Rupiah became the 2nd worst performing currency among Asian countries (After Yen) in the last 12 months. Indonesia however has seen one of the fastest growth rates thereby boosting overall incomes. Still, the policy makers have not taken any decision to increase the fuel prices as of yet.

According to the Chief Economist of Bank Danamon, Anton Gunawan, if no reform is made on the fuel subsidies, the higher oil imports will have an impact on the forex reserve and thereby increase the need for Government’s intervention to stabilize the Indonesian Rupiah. As the investors are worried about the subsidy problem and also the current account deficit, capital outflows are being triggered.

Last week, Indonesian Rupiah tumbled by 0.4% against USD, marking its 3rd straight weekly decline. This also marks the currency’s longest losing streak since last November. Even global fund sold some of the assets of Indonesia on a concern that inflation in this Asian country will increase, widening the fiscal deficit.

Diesel in Indonesia is funded partially by the Government. However, in January, the Government decided to limit the usage of the same. They tried to increase prices in last year, but, the countrywide protests played an instrumental role in blocking the decision. Fuel subsidies have increased to $22 billion in 2012. On the other hand, Indonesia imported around $29 billion of oil products, as far as the official data is concerned. Prakriti Sofat, an Analyst of Barclays said the Government’s decision is important now.