Economists Call The Increase In Foreign Exchange Reserves In May 2024 Driven By Global Bond Issuance

Head of Bank Permata economist Josua Pardede. (Photo: Doc. ANTARA)

JAKARTA - Indonesia's foreign exchange reserves at the end of May 2024 were recorded at USD 139.0 billion, an increase compared to the position at the end of April 2024 of USD 136.2 billion which was the lowest level in the last 6 months.

Head of Bank Permata economist Josua Pardede said this increase was largely driven by several factors, such as tax and service revenues, as well as the issuance of global bonds, or global government bonds.

Josua said that in the foreign exchange reserves in May 2024, there was a capital flow that entered the portfolio market with a total of 319 million US dollars, in which the government's bond market recorded a net flow of 1.2 billion US dollars.

Meanwhile, the stock market recorded a net outflow of US$880 million.

In addition, the increase in foreign exchange reserves was also driven by the issuance of Samurai Bonds and Blue Bonds amounting to JPY 200 billion or equivalent to 1.2 billion US dollars.

Josua explained that this increase was also supported by a trade balance which may still record a surplus in May 2024, due to the recovery in manufacturing and export activities after the Eid al-Fitr holiday.

According to Josua, the position of foreign exchange reserves in May 2024 covers 6.3 months of imports or 6.1 months of imports and government foreign debt payments, well above the standard for international foreign exchange reserves of around 3 months of imports.

"We are still anticipating the risk of high-for-longer policy interest rates and, as a result, we see a potential decline in foreign exchange reserves in 2024," he told VOI, Friday, June 7.

Josua explained that risks related to global uncertainty will remain a major concern during the first semester of 2024, especially related to risk-off sentiment amid a higher for-longer policy interest rate.

"This can limit the flow of foreign funds into Indonesia to a certain extent," he explained.

Josua added that the decline in the trade surplus was due to the normalization of commodity prices and the weakening of global demand, coupled with Indonesia's strong domestic demand, posing a risk of widening the current account deficit.

However, Josua sees that in the second semester of 2024 some of these risks are expected to subside because in that period there is an estimated potential for the Fed to reduce the Fed Funds Rate (FFR) in December.

According to Josua, the reduction in interest rates can increase risk-on sentiment, which has the potential to increase capital flow into Indonesia.

"Therefore, we estimate a slight increase in Indonesia's foreign exchange reserves towards the end of 2024," said Josua.

Josua estimates that the position of foreign exchange reserves will fall from the end of 2023 which amounted to 146.4 billion US dollars to 140 billion US dollars-142 billion by the end of 2024.