Bank Indonesia: Hunting for mice!
Bank Indonesia: Hunting for mice!
John Le, Jakarta
From the viewpoint of the regulators, there are the good
banks, and there are the bad banks.
The latest Bank Indonesia's (BI) effort of going after the bad
ones, especially the bad foreign banks that have been speculating
on the Indonesian rupiah (IDR) via the swap market is admirable
but impractical, thanks to its take-no-prisoner approach.
It comes in the form of regulation 6/20/PBI/2004 signed into
law on July 15, 2004.
The regulation redefines the net open position (or NOP) as the
absolute value of on-balance sheet to be less than 20 percent of
capital. On top of that, the sum of absolute on-balance sheet and
absolute off-balance sheet to be no more than 20 percent of the
capital.
In layman's term, this new regulation stifles onshore banks'
ability to support engineered swap commonly done by offshore
parties who trade on the IDR.
By law, offshore parties cannot buy U.S. dollar in the swap
market; hence they resort to buy dollar spot, which values in two
days, from an onshore party. Next, they would sell the dollar at
its value as of tomorrow (or "tom" in bankers' terminology),
which values in one day, and buy dollar spot from different
onshore parties. Positions are kept rolling over until they are
squared off for profits.
In effect, this is just another short-term swap structure
allowing offshore players access to purchasing dollar against
IDR, without legal repercussion.
If the aim is to reduce offshore influence on the IDR by
forcing the local players to avoid swaps and engineered swap
positions, then the BI has partially succeeded. Local players
must now be extra careful in watching the spot leg of the
engineered swaps from maturing.
The negative implications, however, are enormous and worrisome
for a country that is still trying to establish itself as a
market friendly environment to do business.
For starter, this regulation has in essence shut down the
overnight (O/N) swap market as one of the main instruments of
liquidity management, arguably the most critical function of a
bank.
With a money market flooded with IDR and dollar liquidity, a
lackluster corporate loan environment, and risky government
assets, there are not a lot of good choices to place the IDR or
dollar.
Basic onshore transactions involving banks swapping their
dollar to IDR and use the IDR to invest in local government
assets are viewed as disadvantageous. Banks would then be forced
to look beyond Indonesia's border to unload their dollar
deposits.
Conversely, onshore banks, mostly local, with IDR liquidity
cannot swap to dollar to fund their dollar assets.
This, in effect, kills the once vibrant swap arbitrage market
with O/N volume in excess of US$1 billion per month.
Corporate clients are also not immune to this regulation.
Corporations whose foreign exchange needs for cash value the same
day used to be able to get their cash immediately because banks
are able to square off positions using swap without incurring
NOP.
With the new regulation, banks would have to tell their
corporate clients to come back in a few days to receive the cash
because squaring against the swap market will incur NOP for both
on and off-balance sheet.
Thus, there is no rationale to giving the money to the clients
immediately.
Enough said, if BI is going after offshore speculators, then
it should go after them selectively. Recent issuance of warnings
to those onshore branches of foreign banks shows good
disciplinary action.
Better yet, BI should impose this draconian NOP rule only on
those wrongdoers instead of punishing all market players.
This approach of burning down the hut to hunt for mice clearly
does not bode well to the future of the Indonesian market and to
those who are trying to develop it.
The writer is a financial market analyst working for a
multinational firm in Jakarta.