Bank Indonesia forex ruling hurts local hedging market

JAKARTA (JP): Bank Indonesia's ban on offshore forward transactions has eliminated the ability of local companies to protect their dollar borrowings as most local banks are still too weak to offer large hedging transactions, an executive at a state brokerage said on Thursday.

Vice president of economic research at state brokerage firm PT Danareksa Sekuritas Raden Pardede said that Bank Indonesia's forex ruling might have even induced the rupiah's recent weakening.

"They (Bank Indonesia) have tried to contain the rupiah's fluctuation with the ruling, but what we've seen lately is that it has fallen sharply nonetheless," Raden told reporters on the sidelines of a seminar on Indonesia's economic outlook held by Danareksa.

On Monday, the rupiah unexpectedly dropped to 9,830 against the U.S dollar from its opening position of 9,685, after weeks of relatively steady performance.

Analysts have blamed worsening ethnic clashes in Sampit, Central Kalimantan for the sharp drop.

The still uncertain prospects of Indonesia's relations with the International Monetary Fund (IMF) has also shed a negative sentiment across the market.

But according to Raden, companies have scooped the U.S dollar in the spot market on Monday, as local banks couldn't cope with the surge in hedging demands.

"This move has placed a great deal of pressure on the rupiah lately. Security or political worries just add to the pressure," he said.

He said companies with U.S dollar denominated debts had feared the rupiah would keep falling, and so they wanted to hedge their dollar positions.

But local banks were unable to meet the demand, he said.

Raden said that banks here could hardly speculate on the forward market, as they were still in the process of recovery.

And since the new ruling abolished the offshore rupiah forward market, he went on, companies were unable to hedge their dollars in Singapore.

"The ruling has prevented companies from doing the hedging in Singapore," he explained.

Bank Indonesia issued the ruling in January, in an attempt to lower the rupiah's volatility by curbing offshore speculation on the currency.

The ruling bans the transfer of rupiah from onshore banks to nonresident parties, thus closing speculators' access to funding for short rupiah positions.

It also limits the maximum forward transaction without any underlying investment purposes between onshore banks and nonresidents to US$3 million from $5 million.

Analysts have also said the regulation has effectively shut down the offshore market in the rupiah, making it difficult for overseas dealers to speculate against the currency since the supply of rupiah funds has virtually dried up.

Since the ruling was implemented on Feb. 7, the rupiah gained in stability amidst the then mounting political tension.

Reports of a worsening relationship between the government and the IMF failed to hurt the rupiah.

Until last week, when ethnic clashes in Sampit broke out, the rupiah maintained its relatively stable course.

But Raden said that speculators were needed to allow companies to hedge their dollar positions.

"There is a real demand out there for debt repayment in U.S dollars," he said.

He said speculators often become Bank Indonesia's scapegoats when blaming the rupiah's fall.

Even though the central bank's ruling cut speculation on the rupiah, he continued, the currency fell sharply anyway.

"The ruling has proven to be counterproductive," he said.

On Thursday, the rupiah closed at 9,860 against the dollar only slightly lower from its opening at 9,855. (bkm)