Analyst questions point on RI moves over forex controls<\/p>\n
SINGAPORE (Reuters): Indonesia might think foreign exchange
\ncontrols are an easy cure for the hemorrhaging rupiah, but
\nanalysts say any control measures will be little more than a
\nband-aid.<\/p>\n
A broad Malaysia-style clampdown -- involving a pegged
\nexchange rate and a ban on offshore trading -- is highly unlikely
\ngiven Jakarta's dependence on the International Monetary Fund,
\nwhich is bound to oppose any drastic control on capital flows.<\/p>\n
But in the wake of recent comments by Indonesian officials and
\nthe IMF's softened stance on forex controls, the market does
\nexpect some form of tinkering.<\/p>\n
\"I think they'll probably tighten up on existing regulations
\nand they may even try to expand them into the area that Thailand
\nhas done,\" said Simon Flint, currency strategist at Bank of
\nAmerica.<\/p>\n
Indonesia currently limits non-trade or investment-related
\nforward contracts with offshore parties to US$5 million and
\nrequires financial institutions to report all cross-border
\nforeign exchange transactions exceeding $10,000 every month.<\/p>\n
Thailand, which is also under an IMF program, has similar
\ncurbs on forward contracts, limiting them to 50 million baht per
\ncounterpart.<\/p>\n
The Bank of Thailand also requires exporters to repatriate
\noverseas earnings within 120 days and convert them to baht within
\nseven days.<\/p>\n
Analysts said Indonesia could be planning to make exporters
\npark their foreign earnings with the central bank or it might be
\nconsidering imposing an exit tax on short-term outflows.<\/p>\n
But given the size of the country and the fact that the
\nrupiah's weakness is driven mainly by domestic retail buying of
\ndollars and corporate hedging, they say there's little the
\nauthorities can do.<\/p>\n
\"They're likely to more rigorously enforce the offshore swaps
\nlimitation. However, right now that's really not the problem.
\nYou're not seeing large-scale borrowing of the rupiah in order to
\nsell it,\" said BoA's Flint.<\/p>\n
Indonesia's history of capital flight and corruption would
\nalso make any fresh curbs on exporters difficult to implement.<\/p>\n
\"If you take what happened in Malaysia, they decided to close
\nthe door before capital exited,\" said an analyst at a U.S.
\ninvestment bank in Jakarta.<\/p>\n
\"In the case of Indonesia, there's not a lot of capital left
\nin the country,\" he said, noting that any controls would be aimed
\nat stabilizing the rupiah.<\/p>\n
The currency stood at 8,420\/70 per dollar in late Friday
\ntrade, off its recent lows of 8,750 as uncertainty over potential
\ntrading curbs prompted players to cut their short positions.<\/p>\n
But it was still a long way from the average 7,000 per dollar
\nlevel assumed in Indonesia's barely two-month-old budget.<\/p>\n
\"Clearly the markets do not like controls of any form, but
\nequally, if you've got short-term destabilizing capital flows,
\nthen no central bank or government can live with that for long,\"
\nsaid Robert Rountree of Prudential Bache Securities in Hong Kong.<\/p>\n
On Friday, Indonesia's central bank governor Sjahril Sabirin
\nsaid he was against outright capital controls, but would be
\nwilling to consider \"grey area\" measures such as steps to control
\nrupiah flows.<\/p>\n
He also said the bank would not waste its reserves defending
\nthe currency if it could not be sure of achieving medium-term
\nstability in the exchange rate.<\/p>\n
But that looks like a remote prospect given the scale of
\ndollarisation in the economy, which is fueled by local investors
\nparking funds in U.S. dollar deposits as political risks grow.<\/p>\n
\"What they really need to do is to ban retail buying and
\nselling of dollars without trade documentation,\" said Bhanu
\nBaweja, regional economist at IDEAglobal.com.<\/p>\n
\"But this would lead to a run on the current pool of retail
\ndollars and Indonesia doesn't have the ability to defend that.\"<\/p>\n
To truly put the rupiah back on the road to recovery, the
\ngovernment needs to address the cause of its malaise, not simply
\ntreat the symptom.<\/p>\n
\"It's really a question of people developing more confidence
\nin macroeconomic management and the political situation,\" said
\nFlint at BoA.<\/p>",
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