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.