Indonesia Central bank offers to swap forex for govt bonds

JAKARTA: Indonesia's central bank has introduced a facility to swap its US dollar holdings with Indonesian government bonds held by local foreign exchange banks, a move aimed at stabilising the rupiah currency and government bonds.

Authorities worldwide are on guard to calm financial markets worried about crises in Europe and the US, which have led foreign investors to sell off Indonesian stocks.

The swap will be conducted through auctions, where foreign exchange banks can request for one unit of foreign currency in exchange with their government bonds, the central bank said in a statement on late Wednesday. Foreign exchange banks are defined as ones that do foreign-exchange transactions.

Analysts see the move as reducing pressures on Indonesian government bonds and the rupiah as investor confidence remains shaky due to the Europe and US worries.

"Essentially, this move is quite clear cut. If there's a panic on risk of substantial outflows from the bond market, for example, instead of selling bonds right away, they can swap with Bank Indonesia for USD," said Gundy Cahyadi, an analyst at OCBC in Singapore.

The rupiah has slightly weakened to 8,525 per dollar today compared with 8,500 on Wednesday, while the benchmark 10-year government bond yield rose to 6.93 percent from 6.85 percent as foreigners sold 1.43 trillion rupiah ($167.7 million) of Indonesian government bonds in two days.

The finance ministry failed to sell debt in an auction on Tuesday as investors pressed for higher yields.

Traders said the new facility would reduce panic in the market as Bank Indonesia could provide dollar liquidity. The central bank has $122.7 billion in foreign exchange reserves as of end-July, up 27 percent from $96.2 billion in end-2010.

"They are trying to kill two birds with one stone," said Teckwee Yeo, an analyst at RBS in Singapore. "Definitely it will help to a certain extent boost confidence in the bond market."

In its latest policy statement on Tuesday, Bank Indonesia said the global market turmoil would have only "limited" impact on the country, and Indonesia's banking industry remained stable as reflected by an average capital adequacy ratio of far above 8 percent.

Copyright Reuters, 2011