(June 12): Indonesia’s central bank has been tightening oversight of Wall Street lenders and local financial institutions as it tries to stem the rupiah’s decline and support Southeast Asia’s largest economy, according to people familiar with the matter.
Bank Indonesia has been stepping up monitoring of banks’ foreign-exchange (forex) dealings to ensure transactions are conducted for commercial rather than speculative purposes, the people said, asking not to be identified discussing confidential matters. That is in line with recent central bank announcements that it would strengthen oversight of banks and companies with high US dollar-purchasing activities.
At a dinner with bank chiefs in Jakarta last week, Bank Indonesia governor Perry Warjiyo told the executives that the central bank is monitoring seven lenders with high volumes of forex trading, without identifying them, some of the people said. Bank Indonesia also pressed international banks to bring more dollars onshore during other recent meetings, according to the people.
The increased oversight underscores the mounting concern among Indonesian officials about the rupiah’s decline, which is part of a broader sell-off in the nation’s assets fuelled by worries over President Prabowo Subianto’s economic policies and exacerbated by the fallout from the Iran war. Warjiyo spoke with global investors this week after his central bank conducted a surprise interest-rate increase to shore up the currency, the worst performer in Asia this year.
When hiking rates, Bank Indonesia announced plans to intensify interventions to stabilise the rupiah, and to monitor banks and corporations that buy dollars in bulk to ensure they have underlying documentation to justify the purchases. The combined measures may be starting to pay off, with the rupiah headed for its best week since Oct 3.
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The central bank has already been sending officials to dealing rooms to monitor forex transactions and ensure any dollar buying is carried out with appropriate documentation, some of the people said. For large greenback purchases, dealers will immediately get a phone call from the central bank to ask for the details of the transaction, including who the clients are and the underlying reason for the trade, one of the people said. Banks are prohibited from holding long positions in the dollar and from taking speculative bets, the person added.
Discussions have taken place between senior central bank officials and the Indonesia Association of International Banks in recent months, and talks accelerated after the rupiah fell to a record low in early June, the people said. The industry group, known as Perbina, consists of more than 20 banks including Bank of America Corp, JPMorgan Chase & Co, Deutsche Bank AG, Citigroup Inc, HSBC Holdings plc and Mitsubishi UFJ Financial Group Inc.
Some financial institutions in Indonesia have been grappling with tighter dollar liquidity after the government ordered exporters to park their proceeds in the US currency at state-owned banks. That has made it difficult for private-sector lenders to conduct everyday business, the people said.
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Still, the headquarters of European and American banks operating in Indonesia are becoming reluctant to bring dollars onshore in the absence of significant reforms, some of the people said. With the rupiah falling, they don’t want a situation where the central bank will prevent them from moving dollars out of the country, they said.
Bank Indonesia and the Indonesia Association of International Banks didn’t respond to requests for comments.
Since taking office in October 2024, Prabowo has pursued an ambitious agenda aimed at lifting annual growth to 8%. He has been pushing for a larger state role in the economy through policies ranging from a nationwide free school meals programme to pumping billions of dollars into sovereign wealth fund Danantara. More recently, his move to bring key commodity exports under direct state control to curb tax evasion sparked a sell-off in exporter stocks.
Indonesia is grappling with rising oil prices as a net energy importer. That is increasing its fuel-subsidy burden just as revenues remain weak and borrowing costs rise, adding to concerns over the country’s sovereign credit outlook.
Other countries in Asia are also grappling with weak currencies in the wake of the energy crisis. From South Korea to India and the Philippines, policymakers have ramped up efforts to curb offshore forex speculation.
But Indonesian assets have stood out as among Asia’s worst performers this year. The rupiah has fallen about 7% against the dollar, equities have dropped more than 30% — the most in the world — and bond yields have surged. Investors remain wary of Prabowo’s spending plans, policy interventions and populist agenda, while uncertainty over a potential MSCI stock index downgrade has weighed on sentiment for months.
For international investors, the exit last year of former finance minister Sri Mulyani Indrawati marked a crucial point. Widely seen as a proponent of fiscal discipline, she had reassured markets that Indonesia would maintain the conservative budget management that helped it earn investment-grade credit ratings and attract long-term global capital.
The Indonesian government has been scrutinising the financial services sector as part of its tighter oversight of exporters. Authorities questioned bankers at the local unit of Malayan Banking Bhd. about transactions relating to export activities by a palm oil producer, people familiar with the matter said this week. Neither the bank or the company, PT Salim Ivomas Pratama, has been accused of misconduct.
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