Yellow light! Foreign Currency Savings Begins to Decrease, Is This The Result of “Stubbornness” Not Raising Interest Rates?

By Eko B. Supriyanto, Chief Editor of Infobank

INTEREST rates are not like ethnic groups. Higher interest rates are always sought by investors to save their money. Ethnic groups have loyalty and homeland. Money has never had a homeland. The difference in interest rates on foreign exchange deposits is what is happening now.

Money everywhere it is, is always looking for higher interest rates. Now the atmosphere is more sensitive. When the domestic foreign exchange interest rate is lower than the foreign exchange rate at banks in Singapore, for example.

As of July 2022, Bank Indonesia (BI) has not yet raised its benchmark interest rate. BI-7 Day Reverse Repo (BI7DRR) remains at 3.5%. The regulator, domiciled in Jalan Thamrin, Jakarta, still maintains BI7DRR at the level of 3.5% for the 17th time, since April 2021. This figure is the lowest level since it was enacted in August 2016.

BI believes that the inflation which starts to “flame” has not destroyed the economic order yet. The core inflation rate can still be controlled with this low interest rate. It means that the inflation rate of 4.33% will not burn the Indonesian economy in the midst of blazing global inflation.

It almost never changes that the inflation target set by BI when compiling monetary figures is 3% plus minus one. Inflation is now at 4.33%, BI is still calm. It is not yet swayed BI to immediately raise its benchmark interest rate. Because, in accordance to BI’s consideration, core inflation can still be tamed, since the current inflation is influenced by food needs.

Meanwhile, the rupiah exchange rate is also considered safe. It occasionally breaks above Rp15.000 per US dollar. However, the rate more often below Rp15.000. In fact, the target of the State Revenue and Expenditure Budget (APBN), the rupiah is pegged at Rp14.350 per US dollar with inflation of 3%. The fuel price assumption is US$63 per barrel, even though the current fuel price is already above US$100 dollar.

The point is BI is still confident. Not raising interest rates, even though the “god” of the Indonesian economy, the IMF, asked BI to raise interest rates. BI remains unmoved because it is still convinced that low interest rates are sweet medicine that is still “effective”. Because of this jumbo subsidy on fuel, BI did not raise interest rates in the midst of rising inflation and global interest rates.

The Federal Reserve or the United States central bank raised the Fed interest rate again by 75 basis points (bps) to the range of 2.25%-2.50% at the end of July 2022. The increase in the benchmark interest rate has increased four times since the beginning of the year, Or, has increased by 227 bps.

Jalan Thamrin (BI) is still confident. However, there are some bitter policies for banks. The minimum statutory reserve requirement (GWM) of 9% until September 2022 is like withdrawing liquidity in the market. Banks must set aside a large amount of liquidity. This is nothing but to reduce the rupiah in the market so that it is not used for dollar speculation.

Not only that. Non-rising interest rates will affect to dollar escape to foreign banks. Just listen! At this time currently overseas banks, put Singapore, its interest rate is 1%-1.5%, and some even put up 2.5-2.8% depending on the nominal deposit.

Whereas, the Deposit Insurance Corporation (LPS) guarantee interest rate for the US dollar is only 0.25%. This means that there is a wide gap between the guarantee rate and the interest rates of overseas banks, at least for banks in Singapore. The disparity is between 75 bps until 282 bps.

It could be because there is a decrease in foreign exchange third party funds. Just look at the data as of May 2022, year to date (ytd) there was a decline of US$3.4 billion. The most drastic decline occurred in deposits reaching US$3.05 billion. This could be because the disparity in foreign exchange interest rates in the domestic is not attractive compared to banks in Singapore.

If take a look at the data, there is an “escaping” of funds to foreign banks. Just look at the interest rates of Singaporean banks, such as DBS, UOB, and OCBC, whose interest rates are already in the 2.5%-2.8% range. The bigger the deposit, the higher the interest rate.

The Deposit Insurance Corporation (LPS) should raises interest rates in order to avoid dollar escaping abroad.  However, as usual, LPS was waiting for an increase in interest rates from BI, and it turned out that BI did not also raise interest rates, so the LPS guarantee interest rate did not increase. Or, stay. It could be that the interest rates for dollar deposits of domestic banks are not attractive.

According to Infobank Institute notes, in 2021 until the beginning of 2022, the interbank money market (PUAB) interest rate position is at the level (1.05%) following the position of the Fed Fund Rate at 0.25%. Meanwhile, the PUAB interest rate follows the trend of increasing the Fed Rate’s interest rate of 1.62% versus 1.75% in early July 2022.

According to Infobank Monitoring, currently for several large banks, the dollar loan to deposit ratio (LDR) position is already above 100%. This means that demand for dollar credit is growing and dollar liquidity is dragging, which could be because the interest rates are not attractive.

While, export proceeds and taxes on commodity and palm export royalties are also not small. In May 2022, export taxes and royalties reached Rp420 trillion. This money was made to cover the fuel subsidy which reached Rp502 trillion – a figure that must have swelled in July 2022.

It is inconceivable if Indonesia does not have these exports. This is what distinguishes Indonesia from Sri Lanka. Indonesia is still loved by God. Our country has a fertile nature and producers of natural resources (SDA) needed. If there are no natural resources, it is very likely that the fate of Indonesia will be like that of Sri Lanka. Energy prices are bound to soar, and inflation will flare up.

It could be because of this, BI is still confident that inflation will not flare up and will continue to maintain its policy of interest rates at a low level. However, what remains psychologically worrying is the exchange rate of rupiah. Every time it hits Rp15.000 per US dollar, the market starts to panic.

Although the export of commodities and minerals soared, these dollars did not enter Indonesia. Park first in Singapore. In fact, there is a story circulating that these entrepreneurs take credit at domestic banks in dollars, but if they save their export proceeds in foreign banks, especially in Singapore. This habit has been around for a long time.

Now the Indonesian economy is partly in the hands of conglomerates. Can’t be denied. Cooking oil, sugar, meat, garlic, soybeans, and a number of other food commodities such as wheat flour are all controlled by conglomerates. They also have dollars in Singaporean banks. Not only conglomerates, even under conglomerates have savings in the form of dollars.

Foreign banks, whether mixed or not, also became the main channel for the flow of dollar deposits. Not only from Jakarta. Plantation centers also sell products in dollars from their parent banks. It’s not wrong, but that’s where the dollars flowed into Singaporean and Malaysian banks.

However, don’t be afraid that Indonesia will be like Sri Lanka. Indonesia is stronger. It will not be like Sri Lanka or countries that do not have natural resources such as Indonesia which “gemah ripah loh jinawi” (peaceful and prosperous and very fertile land). And don’t be afraid that the rupiah will weaken, sink too deep, because we have BI which is still confident with this low interest rate.

Don’t forget, we also have “private central banks”, namely conglomerates whose have US dollars in Singaporean banks. Like a US dollar dealer, because the dollars in Singapore banks are not small. Especially now that in the midst of the wide interest rate disparity, when there is no disparity, their money will be fine in Singapore banks.

However. These conglomerates can be called at any time if the rupiah starts to burn. The story of a conglomerate that will exchange dollars after being “phoned” is not a new story, but it has been an old story since before the reform. These conglomerates will exchange their dollars so that the rupiah is strong again.

In Adam Smith’s economic theory there is God’s hand, and it could be that these conglomerates are part of God’s hand. And, the “deflating” of foreign currency funds in domestic banks, is none other than because of the nature of money that has no citizens, money follows more attractive interest rate.

Although it is not a red light yet, and is still in the yellow light or alert stage, the policy of not raising interest rates which is ” stubborn” can be profitable amid skyrocketing interest rates in global markets, however, banks are currently feeling hot because the LDR in foreign currency is already high and foreign currency deposits are high, slowly deflated moving to the Lion Country which still accommodates the money of Indonesia’s rich people. (*)