April 30, 2018 / 1:18 PM / a month ago

UPDATE 1-Indonesia financial industry able to withstand much weaker rupiah - regulators

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By Maikel Jefriando

JAKARTA, April 30 (Reuters) - Indonesia’s financial industry can withstand a stress test of the rupiah weakening to 20,000 to the dollar, worsening non-performing loan levels and rising interest rates, the chairman of the Financial Services Authority (OJK) said on Monday.

The rupiah has been trading near its weakest in more than two years in the past week. It has lost nearly 5 percent since a January high and closed at 13,910 to the dollar on Monday.

“Even if the exchange rate reached 20,000, the banking industry would have no problem,” OJK chairman Wimboh Santoso told a joint news conference with the central bank, the finance ministry and state deposit insurer.

Ratings agency S&P said last month an exchange rate of 15,000 to the dollar was “the psychological level” at which companies with weak balance sheets could struggle with repayments and those with good cashflow might start to restructure their debt proactively.

Bank Indonesia (BI) Governor Agus Martowardojo repeated that the central bank would be prepared to raise the benchmark interest rate to halt a rupiah slump if it threatened the inflation target or financial stability.

Martowardojo also said BI may conduct foreign exchange swap auctions more than once a week to supply the market with rupiah liquidity. He said liquidity was tight at the end of this month due to corporate tax payments.

Earlier on Monday, President Joko Widodo promised his government would not meddle in monetary policy decision-making in response to a weakening rupiah.

“The government will not intervene in monetary (policy) because it is the policy of Bank Indonesia,” Widodo told reporters, adding that he believed the fundamentals of southeast Asia’s largest economy were good.

Last week, BI urged businesses to bolster hedging of their foreign exchange liabilities to protect themselves from losses incurred from the rupiah’s decline.

BI held its main interest rate steady at 4.25 percent at its last policy meeting, saying an increase would be overkill or counterproductive to economic growth momentum.

The central bank, however, is facing growing calls to raise rates to lessen the risk of outflows from the country’s stocks and bonds.

Foreigners hold about 40 percent of the government bond market. Higher rates would stabilise the rupiah by widening rate differentials with the United States and also increase the carry or yield in the high-yielding bond market. (Additional reporting by Gayatri Suroyo, Tabita Diela and Fransiska Nangoy Editing by Ed Davies and David Stamp)

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