Jakarta mulls stricter capital controls<\/p>\n
SINGAPORE (Dow Jones): Despite Indonesian government
\nstatements to the contrary, Jakarta is probably mulling stricter
\ncapital controls to prevent the rupiah spiraling down any
\nfurther.<\/p>\n
This, say analysts, is the only policy option that would have
\nany lasting, uplifting effect on the currency, which at one point
\nyesterday had fallen more than 13 percent against the dollar so
\nfar this month.<\/p>\n
Though political instability and violence in the troubled
\nresource-rich province of Aceh were undoubtedly the catalyst for
\nthe plunge in the rupiah, the introduction Jan. 15 of new curbs
\nlimiting the availability of rupiah offshore - described by some
\nanalysts as a form of capital controls - is at the root of the
\ncurrency's problems.<\/p>\n
The restrictions effectively killed offshore trade and
\nworsened an already dismal balance of payments position by
\nfurther distancing Jakarta from the International Monetary Fund,
\nwhich continues to delay the disbursement of a crucial $400
\nmillion loan tranche.<\/p>\n
The loan is more significant than its mere dollar value.<\/p>\n
Before bilateral and multilateral creditors agree to
\nrestructure and rollover the billions of dollars in sovereign
\ndebt maturing each month, they want the administration of
\nPresident Abdurrahman Wahid to undertake economic and corporate
\nreforms attached to the IMF loan.<\/p>\n
In particular, the IMF is opposed to new legislation that it
\nfeels might curb the independence of the central bank and it
\nwants Jakarta to cancel borrowing mandates of the provincial
\ngovernments.<\/p>\n
The agency also wants greater transparency in the operations
\nof the Indonesian Bank Restructuring Agency (IBRA), which is
\ncharged with resurrecting the nation's embattled banking sector.
\nAlthough an IMF official in Washington expressed hope Monday of
\nfurther progress on talks with Indonesia, the Fund isn't likely
\nto extend the new loan any time soon.<\/p>\n
Credit shock<\/p>\n
With this is mind, Barclays Capital expects the government
\nwill take a two-pronged strategy in a bid to arrest the rupiah's
\nslide.<\/p>\n
\"We expect the government's answer to a growing fiscal and
\nbalance of payments crisis will be a broad-based debt
\nrestructuring or default, and stricter capital controls\" that
\nwould make it harder for investors to get capital out of the
\ncountry, it says in a research note.<\/p>\n
A debt standstill would aid the rupiah as outflows to service
\nforeign debt are a key source of weakness. Last year, this meant
\na $28 billion trade surplus became a mere $8 billion current
\naccount surplus.<\/p>\n
Curbs on capital outflows from Indonesia would tighten
\nexisting rules that allow investors to move funds offshore but
\nrestrict the ability of foreigners to borrow rupiah offshore,
\nmaking it almost impossible for them to \"short\" the currency.<\/p>\n
Barclays says the double-barreled approach may give Bank
\nIndonesia more leeway to monetize part of public debt - that is
\nbuy back the debt, pushing bond yields down, and flooding the
\ncommercial banking system with cash - without the rupiah
\nspiraling out of control.<\/p>\n
\"Therefore we continue to warn the market of what we fear will
\nbe a coming credit shock in Indonesia,\" says Barclays.<\/p>\n
The spark for this financial wildfire is, as usual, politics.<\/p>\n
Though the rupiah plunged during the Asian financial crisis of
\n1997-98, it was the resignation of President Suharto in May 1998
\nafter months of protests, riots and bloodshed that triggered the
\ncurrency's capitulation to an all-time low a month later of Rp
\n17,000 to the dollar.<\/p>\n
The surge of the dollar Monday to an intraday high of Rp
\n11,500 from a close last week around Rp 10,000 was reminiscent of
\nthose dark days, and without an end to political turmoil - moves
\nto impeach Wahid continue - and civil unrest, the outlook for the
\ncurrency will remain bleak.<\/p>\n
\"The risks remain high...and Bank Indonesia has limited
\noptions to defend the currency,\" says DBS Bank analyst Wong Chee
\nSeng. The dollar is set to head toward Rp 12,500-13,000 in the
\nmedium-term, says Wong.<\/p>\n
Traditional options<\/p>\n
More traditional options to defend a currency are not
\navailable to the central bank because: foreign currency reserves
\nat $29 billion are limited and only modestly more than the $26
\nbillion in external debt maturing this year; and steep rate hikes
\nwould hurt local banks.<\/p>\n
So even though dollar sales by the central bank and an
\ninterest rate hike may have helped the rupiah stage a mild
\nrebound to around Rp 10,400, the respite likely will be short-
\nlived.<\/p>\n
Indeed, Bank Indonesia Deputy Governor Anwar Nasution conceded
\nthe central bank's ability to support the rupiah through
\nintervention is limited, as the catalyst for the fall is mainly
\npolitical instability.<\/p>\n
Also not helping the currency are ill-advised, though perhaps
\naccurate, remarks from government officials.<\/p>\n
Chief Security Minister Susilo Bambang Yudhoyono Monday warned
\nof the nation's collapse if \"questions over the national
\nleadership, stability and security are not quickly resolved.\"<\/p>\n
Alluding to the House of Representatives impeachment process,
\nYudhoyono said the uncertainty could last until July or August,
\nwhich, even with radical policy action, would be disastrous for
\nthe rupiah.<\/p>\n
And the violence and social unrest in Aceh is starting to have
\na real effect on the economy, says Simon Flint, currency
\nstrategist with Bank of America in Singapore. Energy companies
\nExxon Mobil Oil Indonesia Inc., PT Arun NGL, and Pertamina all
\nreport partial or total shutdowns of operations in the strife-
\ntorn province, which accounts for more than 4 percent of national
\ngross domestic product.<\/p>\n
A further break down in social order across the archipelago
\nmay increase security risks in neighboring countries, which have
\nso far escaped much of the economic downdraft from Indonesia this
\ntime because Indonesia is viewed as a special case, rather than
\nthe norm in Asia.<\/p>\n
In light of these extraordinary circumstances, assurances from
\nSenior Economics Minister Rizal Ramli that the government won't
\nresort to capital controls in its bid to support the rupiah might
\nreasonably be viewed with a little skepticism.<\/p>",
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