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