Bank Indonesia treads tight rope as rupiah trips

Bank Indonesia treads tight rope as rupiah trips

SINGAPORE (Agencies): Despite its latest foreign exchange
curbs, Bank Indonesia cannot effectively immunize its ailing
currency from further weakness as it tries to please two masters
-- the government and the International Monetary Fund.

The besieged central bank threatened greater enforcement of
existing rules and it tightened rupiah liquidity to the offshore
market on Monday, but its reliance on IMF aid means it cannot opt
for full-scale capital controls.

Nor can it ignore the rupiah's marked depreciation, as the
government struggles to piece together the shattered economy.

In Jakarta the rupiah closed lower on Tuesday as participants
bought the dollar on lingering concerns over domestic politics,
dealers said.

The dollar closed at 9,480 rupiah, up from Rp 9,440 late
Monday.

"Any dollar fall provides a good buying opportunity as the
rupiah remains hostage to domestic politics," said a dealer with
a foreign bank.

Healthy dollar demand from local companies is also weighing on
the local currency, dealers added.

"The central bank is in an awkward position where it has to
get the support from both the IMF and from the government," said
Rebecca Patterson, currency strategist at JP Morgan in Singapore.

Moreover, it also has to contend with a government that is
steadily chipping away its independence, with parliament debating
controversial amendments to central bank law and the president
and central bank governor caught in a protracted public feud.

Analysts expect the bank's new measures to work only in the
short term.

Reflecting this view, the rupiah rebounded to the firm side of
9,400 per dollar after the measures were announced on Monday, but
was unable to extend gains beyond 9,350 and had drifted back down
by Tuesday.

The authorities banned rupiah transfers, including credit
lines or overdrafts, from onshore banks to non-residents, and
lowered the limit for forward transactions with non-residents to
$3 million from $5 million. A chief dealer at a foreign bank in
Jakarta estimated there are currently $50 million worth of such
forward deals outstanding.

Standard Chartered Bank said in a research note Thailand also
tried to sap offshore liquidity of its currency to help shield it
from speculation and further losses, but failed. "We have seen in
Thailand that such offshore squeezes seldom last long," it said.

Also, as Indonesia's central bank again resists calls to force
exporters to repatriate earnings, analysts said enforcing such a
rule may simply be too daunting. And this could be the real
reason for the bank's refusal to pursue the most effective way of
helping the rupiah, short of capital controls.

"They are beginning to realize they do not want excessive
currency weakness because that would induce corporate distress
due to their high external debt liability ... (and) would also
hamper their ability to contain inflation," said Philip Wee,
currency strategist at DBS Bank.

Thailand's crackdown immediately spurred a liquidity squeeze
in the offshore market and stabilized the baht, pulling it back
from 32-month lows of 44.435, hit on November 21.

But it has not been able to sustain all of its gains and is
now only some 2.7 percent above those lows.

Thailand's case proves tightening offshore liquidity only
gives a short-lived boost as it fails to address the root of the
problem -- local corporate dollar demand amid weakening economic
fundamentals.

In Indonesia, difficult political factors make the situation
worse. The rupiah's fall has been largely driven by the
deterioration of investor confidence due to the constant mayhem
in Indonesian politics.

That is the reason why there is very little Bank Indonesia can
do to help the rupiah.

"The root cause is not what BI does," said Simon Flint,
currency strategist at Bank of America in Singapore. "BI is
irrelevant. It's the political and economic situation that they
have to operate in."

Unlike Indonesia, Thailand does require exporters to
repatriate earnings within 120 days and convert them to baht in
seven days after that.

BI's governor Sjahril Sabirin has said repeatedly this would
not work in Indonesia as exporters would be able to convert their
funds back into dollars onshore. But at these high rates, it
would hardly seem like a wise idea, analysts said.

Vincent Low, regional economist at Merrill Lynch in Singapore,
said the problem was really a logistical one.

"With thousands of islands, people will find loopholes and
ways out of these controls, anyway. Which is why capital controls
were never considered very seriously in Indonesia," he said.