INDONESIA'S central bank has few weapons left to defend the rupiah if Asia's worst-performing currency comes under fresh attack, as a government facing election next year dallies over making unpopular reforms that could cut external deficits.
Down 16 per cent against the dollar so far this year, the rupiah has seen its slide level off recently, but investor confidence in Indonesia remains in short supply.
Preparing for more pain, with the United States Federal Reserve (Fed) still to begin tapering its mega-stimulus programme, Bank Indonesia (BI) has beefed up depleted foreign exchange reserves by securing currency swap arrangements with major Asian trading partners.
A US$15 billion (RM47.65 billion) swap arrangement with China was signed on Tuesday, one for US$12 billion was agreed with Japan in August, while another with South Korea is expected soon.
The rupiah and India's rupee were among the currencies hardest hit by the shake-out in emerging markets after the Fed signalled in May that it would slow dollar printing presses once the economy gained traction.
To brake the rupiah's decline, BI has pushed up its main interest rates by 150 basis points since June. But, with the heat off the rupiah for now, and a trade surplus recorded for August, most analysts expect the central bank to leave rates unchanged at its next monthly policy meeting on Tuesday.
When the Fed eventually does begin to taper, BI could come under pressure to raise interest rates further.
"If the bank is reluctant to hike rates, then it has to strengthen its forex reserves using bilateral swap agreements, term deposits, forex swaps," said Eric A. Sugandi, an economist at Standard Chartered.
Higher rates will slow economic growth, and should reduce import demand, but monetary policy will not provide a long-term answer to the country's unsustainable current account deficit.
"The root of the problem is overspending... We need to find the cause of illness when running a fever. The medicine should not only be Panadol to lower the fever," said Dody Budi Waluyo, head of economic research and monetary policy at BI. Reuters