Indonesia's central bank is gradually closing trading loopholes used by global investors in an attempt to exert more control over its weakening currency and prevent a desirable depreciation of the rupiah from turning into a panicky tailspin.
Last week, it reminded domestic banks they are not allowed to dabble in offshore rupiah forward markets. It told them it wants an improvement in onshore trading volume. And it said it will specify the hours during which banks can quote exchange rates for the rupiah.
Looking for motives behind this focus on trading hours and rules in what has been a relatively well-behaved market, analysts suspect Bank Indonesia's aim is to remove room for speculative play before letting the market take the rupiah down slowly.
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The central bank has been selling dollars, limiting the rupiah's decline so far this year to around 0.5 percent, but any intention to manage an orderly decline in the rupiah remains unstated.
But, without that intervention, the rupiah would undoubtedly have fallen faster as the currency comes under growing pressure from the country's huge import bills and the risk of capital outflows.
The current account showed a deficit of $24.18 billion in 2012, following a surplus of $1.7 billion in 2011, according to data released on Wednesday.
The rupiah lost around 6 percent against the dollar in 2012, cushioned by constant, yet subtle intervention.
Bank Indonesia Deputy Governor Hartadi Sarwono said last month the central bank would use various instruments to maintain the stability of the rupiah, and must from time to time intervene in the currency market to ease the pressure on dollar supply created by large, lumpy payments to meet energy imports.
But Sarwono stressed that Indonesia's balance of payments remained in overall surplus, as the capital account surplus covered the current account deficit.
The current account showed a deficit of $7.76 billion in the fourth quarter of 2012, and the deficit for the full year was $24.18 billion, marking a sharp deterioration from the $1.7 billion surplus posted in 2011, according to data released on Wednesday.
Indonesia ended 2012 with a balance of payments surplus of $165 million, down sharply from $11.9 billion the previous year, though it had a surplus of $3.2 billion in the fourth quarter.
A textbook policy response to pressure on the currency would be for Bank Indonesia to raise interest rates.
That could forestall outflows, crimp domestic consumption, and reduce any rise in payments for dollar-priced imports of refined oil products, machinery and food, particularly after the country suffered its first-ever trade deficit in 2012.
But investors and economists alike suspect authorities in Southeast Asia's largest economy are going to take the more politically acceptable route of letting the rupiah weaken, albeit at a pace that keeps foreign investors comfortable while also boosting the value of exports and making imports expensive.
"What's going to be most palatable is to let the currency drift lower, if that's the way the market is pushing it, with obviously some intervention to slow the pace of depreciation," said Robert Prior-Wandesforde, Asian economist at Credit Suisse.
"That is not the most appropriate response, in my view."
If a massaged depreciation is the ultimate intent, the central bank would probably intervene in a subtle fashion, to avoid unsettling foreign investors or unecessarily draw too heavily on its foreign exchange reserves.
Foreign investors hold about $28 billion, or 33 percent of Indonesia's high-yielding government bonds.
And whereas currency reserves, at $109 billion, and equivalent to six months of imports, appear to be a comfortable amount the bank will want to spend them wisely.
Rupiah markets are not pricing in abrupt swings in the currency, quite the contrary. Economists expect there will be a slow drift down in the rupiah.
ING economist Tim Condon said Indonesia's current account will remain in deficit, as it did before the 1998 Asian financial crisis, resulting in a 3-to-4 percent annual depreciation in the rupiah.
"Hot money investors get used to orderly rupiah depreciation," he warned, adding that investing in Indonesia's fast-growing economy made more sense than investing in rupiah-denominated bonds or stocks.
Investors betting on the economy have been going directly into areas such as mining and transport too. Indonesia received a record 221 trillion rupiah ($22.5 billion) in foreign direct investment in 2012.
Rupiah at 10,000
To be fair to the central bank, it has little sway over what would be the most effective policy response to reduce the pressure on the currency, namely hikes in heavily subsided fuel prices.
Southeast Asia's largest economy is growing between 6 and 7 percent a year.
The rapid pace of investment and consumption in the economy has driven imports up, whereas external demand for its coal and other commodity exports has been subdued.
Taken together, the trade deficit and the interest payments to foreigners has left Indonesia vulnerable balancing its external books.
"If the current account is not stabilizing, they really have to go back to the policy basket and pull out something fresh," said Claudio Piron, a strategist at Bank of America Merrill Lynch.
"That is further policy tightening or allowing more depreciation of the currency. But I think ultimately the issue is the oil deficit, which they can do something about."
The quick fix to the rupiah's woes would be to hike subsidized fuel prices, which on average are responsible for about a billion dollars of the trade deficit each month.
But raising prices would be unpopular with voters, who go to the polls for a presidential election in 2014.
With inflation also comfortably in the middle of the central bank's 3.5-5.5 percent target range, it is reasonable to suppose Bank Indonesia's preferred policy choice is to allow a gentle weakening in the currency.
The tricky part, though, would be for Bank Indonesia to manage the pace of that depreciation in a way that forestalls any panic among foreign investors.
Two factors could unnerve them: extreme volatility or any sign that the rupiah will move more than it has done historically, which is on average 7 to 12 percent a year.
Most immediately, that would mean the rupiah, which is being traded around 9,700 a dollar, does not weaken beyond 10,150 in February.
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Barring a brief bout of weakness in January, foreign investors have so far kept their faith. Market pricing of future rupiah volatility is low and stable.
Even the non-deliverable forward (NDF) market, the playground for speculators, belies any sign of concern, with a 3-month pricing for the currency just one percent weaker at 9,800 per dollar.
And that raises the risk that Bank Indonesia will inadvertently stir unease by firing missives at an offshore market whose stability has been reassuring for foreigners, who hedge their rupiah bets in NDFs, instead of focusing on fixing the real issues with the rupiah.
"The irony is that the Indonesian NDF market has been relatively well behaved," said Piron. "So, it may be more harmful than good," he said, referring to the central bank's reminder on the ban on NDF trading last week.