Let speculators panic<\/p>\n
Bank Indonesia should not budge on its move last week to slash
\nthe supply of rupiah that can be used for speculation overseas
\ndespite noisy protests and complaints from banks in Singapore,
\nwhere the bulk of offshore rupiah trading is done.<\/p>\n
The rules that severely limit rupiah transactions between
\nonshore banks and offshore parties will obviously have a big
\nimpact on how the Indonesian currency is traded in Singapore.<\/p>\n
Many Singapore-based banks may have to begin soon unwinding
\ntheir rupiah positions, and as the rupiah trade offshore dries
\nup, many speculators will likely move their deposits back
\nonshore. Banks may also decide to change their rupiah into
\ndollars, thereby further pressuring down the rupiah. But this
\nimpact will only be temporary.<\/p>\n
Most important is that offshore trade in rupiah will dwindle
\nto a trickle or even die because banks will not be able to get
\nfresh supplies of rupiah, and with the interbank market so short
\nof liquidity, not many offshore speculators will be willing to
\ntake speculative positions against the rupiah.<\/p>\n
True, as most analysts have persistently argued, the main
\nreasons for the rupiah's weakening and its volatility are the
\npolitical uncertainty, heavy foreign debt servicing by local
\ncorporate debtors and Indonesian exporters' preference to keep
\nthe bulk of their earnings overseas. But these factors are not
\ncompletely new, having been looming over the economy for the past
\ntwo years.<\/p>\n
These risks should have been factored in by the market and
\nshould have been reflected in the rupiah rate at least since mid-
\n2000, when political pressures against President Abdurrahman
\nWahid began to escalate. If it had only these factors, the rupiah
\nrate should not have fluctuating so wildly. As Bank Indonesia has
\nfound from its close monitoring of the foreign exchange market,
\nspeculators also have been largely responsible for the wild
\nvolatility.<\/p>\n
Moreover, rupiah trading overseas does not benefit the
\nIndonesian economy at all. It, instead, only adds to pressure on
\nthe rupiah. Speculators who use the rupiah simply as a trading
\ncommodity have made the local unit highly vulnerable to rumors,
\nhowever wild they may be, and have put the rupiah rate mostly way
\nbelow the level of what is considered commensurate with the
\neconomic fundamentals.<\/p>\n
Of most importance is that the new rules do not slap any
\nimpediment on Indonesians and foreigners with trade and
\ninvestment deals in Indonesia. And the central bank does still
\nfirmly uphold the fundamental principle of free capital account
\nin the sense that spot onshore transactions and those with
\nunderlying trade and investment deals remain fully free, and
\nJakarta-based foreign banks are treated as residents.<\/p>\n
Moreover, Bank Indonesia has said that maturing foreign
\nexchange transactions agreed to before the new rules took effect
\nmust be honored.<\/p>\n
The impact would have been more chaotic, had the central bank
\ntaken the option of making it compulsory for Indonesian exporters
\nto repatriate their earnings in a bid to increase the country's
\nforeign exchange reserves. Given the inadequate administrative
\ncapacity to administer such a rule, that policy would only
\ndeteriorate into a new source of corruption and collusion.<\/p>\n
Several Latin American countries which had tried this measure
\nfound themselves with more complex problems as exporters tried to
\ncircumvent the measure by underinvoicing their export prices,
\nthereby enabling them to keep most of their earnings overseas.
\nThe governments had to hire international surveyor companies to
\nmake preshipment inspections of exports to check their actual
\nmarket prices.<\/p>\n
It should be realized, however, that the new rules will not
\naltogether stop speculation on the rupiah, nor will they be fully
\neffective in preventing the rupiah from further weakening in so
\nfar as the risk factors that have been looming over the economy
\nare not reduced. Nonetheless, the slash of rupiah supply to
\nspeculators overseas will, at least, neutralize one source of
\npressure on the rupiah.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/let-speculators-panic-1447893297",
"image": ""
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"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
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