Economist suggests BSF value needs evaluation amid rupiah weakness
Jakarta (ANTARA) - The Chief Economist of Trimegah Sekuritas Indonesia, Fakhrul Fulvian, believes that the Bond Stabilization Fund (BSF) needs careful evaluation if its objective is to assist in stabilising the rupiah exchange rate. This is because Indonesia’s primary challenge is no longer maintaining low government bond yields, but rather restoring the function of the financial market to attract the capital inflows required to strengthen the balance of payments and support the rupiah.
“I am concerned that we are attempting to solve the rupiah problem with the wrong instruments. What the market needs right now is a normal yield curve, not one that is continuously held and stabilised through administrative means,” Fakhrul stated in Jakarta on Wednesday.
He explained that Bank Indonesia (BI) has taken significant steps through a 50 basis point increase in the benchmark interest rate. This policy serves as a strong signal that exchange rate stability is now a top priority. However, such a policy could lose its effectiveness if, simultaneously, the bond market is forced to maintain long-term yields at excessively low levels.
“Bank Indonesia has sent a very clear message to the market through the 50 basis point rate hike. However, if the yield curve remains flat or even inverted, that message becomes inconsistent. The market will ask: does Indonesia want to defend the rupiah or defend government borrowing costs?” he continued.
According to Fakhrul, Indonesia’s current yield curve is one of the flattest in recent years. Across many tenors, short-term and long-term bond yields are at nearly identical levels. Normally, investors should receive greater compensation for committing funds over longer periods.
“A healthy yield curve is a sloped curve. When one-year and ten-year tenors offer almost the same yield, something is not functioning normally,” he explained. This condition reduces Indonesia’s attractiveness to global investors at a time when the country urgently needs additional capital inflows.
Fakhrul explained that the root of Indonesia’s current problem is actually a balance of payments issue. Rising energy imports, increasing foreign exchange needs in the private sector, and global uncertainty have significantly increased domestic demand for foreign currency. Conversely, the primary sources of foreign exchange supply come from exports, direct investment, and portfolio investment. Therefore, Indonesia’s ability to attract inflows is becoming increasingly vital.
“Ultimately, domestic dollar demand must be matched with incoming dollar supply. If foreign exchange demand increases while we make Indonesian financial assets less attractive, pressure on the rupiah will persist,” he explained.
Government bond markets have traditionally been a key instrument for attracting foreign capital to Indonesia. However, this mechanism only works if investors receive adequate risk compensation. “Global investors buy bonds because they seek yield. If yields continue to be suppressed, the incentive to enter Indonesia diminishes,” said Fakhrul.
Furthermore, current market conditions differ greatly from a decade ago when foreign ownership of Government Securities (SBN) was at very high levels. Currently, the proportion of foreign ownership has dropped drastically, meaning the benefits of maintaining low yields are no longer as significant. Conversely, the economic cost of losing financial market attractiveness is growing.
Fakhrul even assessed that if the goal of the Bond Stabilization Fund is to support the rupiah, the policy could potentially produce the opposite effect. “If the ultimate goal is to strengthen the rupiah, then suppressing yield increases could be counterproductive. The rupiah needs inflows. Inflows need attractive assets. Attractive assets require healthy price discovery,” he said.
Currently, Indonesia requires a bond market that operates normally, rather than one that is overly controlled. Fakhrul believes this is the right moment for the Ministry of Finance to adjust its policy direction. Following Bank Indonesia’s hawkish move, it is now the turn of fiscal policy and bond market management to provide aligned support.
Achieving rupiah stability cannot be achieved solely through foreign exchange market interventions or interest rate hikes. More importantly, Indonesia must ensure a healthy balance of payments and the ability to attract sufficient capital inflows to meet national foreign exchange needs.
“The rupiah is ultimately a reflection of the balance of payments equilibrium. If we want a stronger rupiah, we must ensure Indonesia remains an attractive investment destination. This can only be achieved if our financial markets function normally,” he said.
“It is time for policy focus to shift from bond price stabilisation to balance of payments stabilisation. The rupiah cannot be stabilised with an inverted yield curve,” he concluded.
As of today, the rupiah exchange rate remains under pressure, breaching the level of Rp17,926 per US dollar.