The Fortunes of Indonesia’s Rupiah Are at Risk of Reversing

Just when Indonesia’s rupiah appeared to begaining an edge on the dollar, its fortunes are now at risk of reversing.

A proposal by lawmakers tooverhaul Bank Indonesia’s mandate and its role in setting policy could raise investor concerns about the central bank’s independence — a move that could jeopardize the rupiah’s recovery from a pandemic-driven rout, according to Australia and New Zealand Banking Group Ltd.

“Any changes that could erode Bank Indonesia’s independence will likely give investors cause for concern,” said Khoon Goh, head of Asia research in Singapore. The “rupiah will end up under more pressure than Indo government bonds — this is what occurred when BI’s burden sharing plan was first announced in July.”

Indonesia’s bonds and currency, risk benchmarks that traditionally move in tandem, have diverged after Bank Indonesia took the unusual step of monetizing debt to help fund the nation’s stimulus plans. While 10-year bond yields have dropped about 35 basis points in the current quarter, the rupiah has lagged with a loss exceeding 2%, signaling discomfort by foreign investors.

A draft bill presented to the parliament’s Legislation Committee on Monday proposed setting up a five-member monetary board to help BI to determine policy. It recommends the board be headed by the finance minister, and include the economic affairs minister, among others.

The “proposals call for a continuation of BI’s role as a provider of temporary financing to the government when revenue shortfalls arise, which may further blur the boundaries between the government and the central bank,” said Anushka Shah, a senior analyst at Moody’s Investors Service. That may “push further out the exit of the debt monetization scheme.”

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