Bank Indonesia's new forex ruling long-awaited
By Reiner S
JAKARTA (JP): Bank Indonesia's new foreign exchange ruling, which cuts off rupiah supply to offshore players for speculative purposes is a long-awaited measure that will, according to experts, help restore stability in the ailing rupiah.
Currency market analyst Farial Anwar said the supply of rupiah overseas had been mainly used for speculation activities, and the rupiah's exchange rate had been dictated by offshore speculators.
"This (the forex ruling) is a long-awaited measure. The rupiah has been a target of overseas speculators since the crisis started (in mid-1997)," Farial told The Jakarta Post on the weekend.
"Stability in the rupiah's exchange rate is very important," he added.
Theo Toemion, a currency analyst turned politician, agreed. "Better late than sorry."
Both dismissed reports quoting foreign currency dealers as saying that the new foreign exchange (forex) ruling would affect confidence in the economy.
"It's not capital control. People are still free to bring in or take out their dollars," Farial said, adding that confidence will much depend on the country's political development.
He acknowledged that the forex ruling would cut off the profit of foreign banks, particularly those in Singapore which had been actively speculating against currencies of politically instable nations, including Indonesia and the Philippines.
He said that in addition to currency speculation, foreign banks had been offering free-tax rupiah deposits for interest rate arbitrage purpose, particularly to benefit from the high interest rate of Bank Indonesia promissory notes.
"Now they can no longer do those things," he said.
Bank Indonesia announced the new forex ruling in mid-January, and issued a circular clarifying the new ruling last week as many foreign bankers had been reportedly confused by the ruling.
The ruling basically bans onshore banks from making certain transactions with nonresidents, including foreigners and foreign institutions, and reduce the limit of forward transactions without any underlying investment purpose between onshore banks and nonresidents to US$3 million from $5 million previously.
Branches of foreign banks operating in the country, foreign investment companies set up under Indonesian law, and nonprofit international organizations in Indonesia, including the IMF, UNICEF and the Red Cross, are categorized as residents.
The type of forbidden transactions include: the provision of credit and overdrafts, both in rupiah and forex, to nonresidents; placement of funds in rupiah with nonresidents, including transfer of rupiah to banks abroad; purchases of securities issued by nonresidents; interoffice transactions in rupiah; and equity participation in rupiah with nonresidents.
Violators of the ruling face various penalties.
Bank Indonesia said in the circular that onshore banks could still make intraday overdraft transactions with nonresidents as long as they were supported by a Message Type (MT) 210 document.
The circular also said that residents who have outstanding rupiah commitments with nonresidents may still conduct the necessary transaction until Wednesday.
Successful
Bank Indonesia deputy governor Miranda Goeltom said last week that the new forex ruling had successfully helped reduce the volatility of the rupiah.
Miranda pointed out that the rupiah had been hovering at the Rp 9,400 to Rp 9,500 level per U.S. dollar despite intensifying conflict between the legislature and President Abdurrahman Wahid amid allegations of his involvement in two financial scandals.
"The rupiah is now less volatile compared to conditions in August-December last year," she said.
She added, however, that other factors, particularly domestic political conditions would still affect the rupiah.
Farial said that due to political and economic factors, the new forex ruling would not automatically strengthen the rupiah.
Farial pointed out that demand on dollars would remain high amid strong imports and payment of maturing corporate foreign debts, while the supply of dollars was limited as exporters declined to park their earnings at home and foreign investment remained slow due to the political problems at home.
Imports in 2000 totaled $33.55 billion, and many analysts have said the size of imports this year would be relatively the same. Corporate foreign debts maturing in 2001 total $18.9 billion.
"With the greater demand on dollars compared to supply, plus the continuing political problems, are you still optimistic that the rupiah will get stronger?" Farial said.
The rupiah ended at Rp 9,430 per dollar late on Friday, higher than Rp 9,525 on Thursday despite growing calls for Abdurrahman to resign.
Bank Indonesia Governor Sjahril Sabirin said on Friday the central bank would intervene if the rupiah deteriorated amid an escalation in the domestic political temperature as calls for Abdurrahman to resign intensified.
"Let's hope the rupiah will not get much weaker, but if it does, we'll take the necessary steps, including intervention. We have sufficient forex reserves to do that," Sjahril said.