JAKARTA: Indonesian interest rates may still need to go up significantly to help counter a slide in the rupiah, but there is no sign of the sort of panic-selling seen during the financial crisis two decades ago, the head of the country's biggest listed bank said.
Foreign investors have been dumping Indonesian bonds, stocks and rupiah currency amid an emerging market sell-off spurred by rising US interest rates and fears of contagion from financial crises in Turkey and Argentina.
On Monday, the rupiah fell 0.7 per cent to 14,820 to the dollar, its weakest level since the Asian Financial Crisis in 1998. It has lost nearly 9 per cent this year.
Jahja Setiaatmadja, chief executive of Bank Central Asia, the largest bank by market value, told Reuters he does not envisage any re-emergence of the type of panic-selling that occurred in the late 1990s.
"As long as there is no sudden slump (in the rupiah) and there are instruments to maintain stability, I think everything should still be under control and there won't be panic," said Setiaatmadja, a veteran banker who has held senior positions at BCA for nearly three decades.
BCA, along with many other Indonesian banks, had to be bailed out during the Asian financial crisis by the central bank after massive withdrawals of deposits as the rupiah plummeted from around 2,000 a dollar to an all-time low of 16,800.
"People are not panicking over the dollar now," said Setiaatmadja, adding that the rupiah's depreciation reflected of Indonesia's higher inflation rate compared to the United States and its deficit in external balances.
Indonesia's August annual inflation rate was 3.20 per cent, the statistics bureau said on Monday.
To defend the rupiah, Bank Indonesia (BI) has raised its benchmark interest rate four times since mid-May, by 125 basis points. BI has also spent billions of foreign exchange reserves to intervene in the currency and bond markets. An official confirmed more intervention on Monday.
Setiaatmadja said BI may have to hike rates by at least 200 bps more to maintain interest rate differentials with the U.S. if the Federal Reserve keeps hiking at least into 2019.
VIEWS FROM FITCH
On Monday, ratings agency Fitch said Indonesia's rates may have to rise another 100 bps through 2020 and warned that foreign exchange reserves may be lower than its current estimate of US$109 billion by the end of 2018. At the end of July, reserves totalled US$118.3 billion.
Fitch praised measures by Indonesian policymakers to stem capital outflows and noted the banking sector's strong capital position as it affirmed Indonesia's investment grade credit rating.
Setiaatmadja said the market outlook meant BCA would have to raise credit rates and would not be too aggressive in lending.
He said the bank would probably budget for 10 per cent loan growth for 2019, slightly down from the 12 per cent outlook for 2018.
BCA was not going to avoid lending to any particular sector because of default risks due to dollar exposure, but Setiaatmadja noted a risk of cost overruns for infrastructure projects that use imported steel.
The banker said manufacturers' margins may be squeezed too.
"Prices of all imported raw materials will rise. Producers will see whether consumers are ready to accept higher prices and they will pass this on only if consumers are ready," he said.