2012.06.07 12:04:19 Fitch: Not Worried About Decline in Indonesia's Forex Reserves

By Ben Otto JAKARTA--Fitch Ratings Thursday cautioned that a fall in Indonesia's foreign exchange reserves highlights a longstanding weakness in the country's external finances, but said the drop doesn't change its outlook for the sovereign. Bank Indonesia's forex reserves dropped almost $5 billion in May to $111.53 billion at the end of the month, undoing most of the gains made in April. In a statement Fitch attributed the decrease to valuation effects and central bank intervention aimed at propping up the rupiah, Southeast Asia's worst-performing currency in 2012. Fitch, which last December became the first of the three major credit rating firms to raise Indonesia's rating to investment grade, said that the fundamental strengths behind its rating for Indonesia remain. These include strong economic growth, declining public debt, and the long-term strengthening of external liquidity. It said it is not yet "unduly concerned about the magnitude of the fall in reserves," but noted the potential risk of capital flight stemming from shocks to investor confidence. "Indonesia's open capital account makes the risk of destabilizing short-term capital flows unavoidable. The need to further strengthen the external finances through foreign exchange reserve accumulation has therefore long been a factor in our ratings analysis," the agency wrote. Bank Indonesia stepped up intervention efforts as the rupiah went on a dramatic slide in May, due in part to a lack of U.S. dollar liquidity as foreigners rushed to sell rupiah assets amid fears of a Greek exit from the euro zone. Traders said the central bank sold some $2 billion of its reserves last week--its biggest intervention of the year--after trying to build up its reserves due to concerns about a worsening current account deficit. Indonesia has recorded two straight quarters of current account deficit, and last week posted its first monthly trade deficit in almost two years. Despite the fall in reserves, Bank Indonesia appears ready to continue its intervention. Deputy Governor Hartadi Sarwono on Thursday said again that BI would continue pumping dollars into the local currency market to reduce the rupiah's volatility. While further intervention is likely to further erode the central bank's reserves, the level remains nearly double that four years ago, and enough to fund six months of imports and repayment of short-term offshore debt. Write to Ben Otto at ben.otto@dowjones.com (END) Dow Jones Newswires June 07, 2012 06:04 ET (10:04 GMT)