EFTA01379389.pdf

22 December 2017 EM Currency Handbook 2018: Still Fuel in the Tank Indonesia During the 1990s, Indonesia operated a heavily The rupiah is convertible on the current account: while managed FX regime - essentially a fixed conversion not open on the capital account, policies have rate with pre-announced intervention bands (initially accommodated increased FDI and portfolio flows. +1-0.25%) in a framework for creeping depreciation. But being too slow to move the market rate up, Bank USDIIDR exchange rate Indonesia was forced to widen its intervention bands 16000 6 times between January 1994 and September 1996. Then, as the Asian Financial Crisis took hold, and a 14000 • further widening in July 1997 failed to stabilize the 12000 currency, IDR was allowed to float freely on August 14. The spot market spiked to 17,000, from 2,500. 10000 WOO • After the Asian Crisis - and under the supervision of an IMF program till 2003 - authorities sought to use FX 6000 policy - via higher interest rates, regulations over 4000 - market access, direct intervention and moral suasion - to dampen market volatility and encourage a stronger MOO -• rupiah. Today, the BI website notes prominently: "Bank 0 Indonesia has one single overarching objective: to 81 96 01 11 16 establish and maintain rupiah stability" In the early 2000s and after the 2008 crisis, a stable to USD/IDR spot rate and 3M NDF premium stronger rupiah contributed to lower inflation and 16000 —IDR Spot 1,400 reduced external debt servicing costs, while strong 15000 —IDR 3M Forward Points, RHS 1.200 capital inflows and a stable current account allowed BI to fully repay IMF debt and build international reserves 14000 l 1.000 However, things began to change in 2011 as the 13000 t 800 current account deteriorated and capital financing 12000 -1 600 became more erratic. Illiquidity and multi-tiered FX 11000 400 prices were often a concern. Intervention led to significant drawdown in reserves over 2013 during the 10000 I. 260 taper-tantrum. Market stress prompted authorities to 9000 4 0 tighten monetary and fiscal policy, and make efforts to 8000 200 improve FX liquidity. 09 10 11 12 13 14 15 16 17 In the past few years, responsible macroeconomic policy-making from inflation management, fiscal prudence, reform focus, reserve rebuilding, improved USD/IDR 3M historical vs. implied volatility price discovery and transparency appears to have paid off. A number of regulatory changes have also taken effect from the mandatory use of rupiah for domestic transaction to hedging requirements on private non- bank external debt in 2015, While exposure to offshore debt holdings is still among the highest in the region, the IDR spot market depth has improved, the current account deficit has moderated and become more sustainable, external debt has peaked, and reserves coverage looks more comfortable. From 2017 onwards, BI appears to have adopted a more apparent volatility management strategy for the rupiah, accumulating significant amount of reserves to keep the currency -10 near fair value, and preventing large swings in FX. 04 06 06 07 08 09 10 11 12 13 14 15 16 17 Scow 08 abbeMinton Fns'!'. Snotty° Hew IO Deutsche Bank Securities Inc. Page 23 CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0076826 CONFIDENTIAL SDNY_GM_00223010 EFTA01379389