BI forex ruling diverts speculators into stocks

JAKARTA (JP): The new Bank Indonesia foreign exchange (forex) ruling has prompted offshore speculators to divert their attention toward the local stock market after losing the opportunity to profit from speculation against the rupiah, according to a senior official at the central bank.

Bank Indonesia spokesman Halim Alamsyah said on Saturday that previously the dominant activity of offshore investors trading in Indonesia was in the forex market, followed by derivative investments and then stock trading.

"But after the issuance of the new forex ruling, the dominant activity is in the stock market," Halim said. He did not provide figures.

Indeed, the daily transaction volume on the Jakarta Stock Exchange jumped to Rp 1.39 trillion (about US$146.3 million) earlier this month, compared to between Rp 100 billion and Rp 200 billion previously. Meanwhile the stock index increased to new highs despite increasing domestic political instability following the parliament's censure of President Abdurrahman Wahid over his alleged involvement in two financial scandals.

Stock traders said that the rise in the stock market was caused by the inflow of offshore money.

Bank Indonesia announced in the middle of this month the new forex ruling which bans the transfer of rupiah from onshore banks to non-resident parties, thus closing speculators' access to funding for short rupiah positions.

In addition, the maximum forward transactions without any underlying investment purposes between onshore banks and non- residents has been reduced from US$5 million to $3 million. The move is aimed at curbing speculative trading on the rupiah.

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

Halim said that the shift of offshore investor activity into the stock market should be good for both the rupiah and the stock market.

"The rupiah should become more stable which would also be good for businesses, particularly exporters in making import (of raw materials) calculations," he said.

He added that a livelier stock market would help the local corporate sector to raise funds for working capital.

Halim reiterated that the forex ruling has reduced the volatility in the rupiah, as evidenced in the decline of the overnight swap rate to less than 5 percent.

"I think the rupiah will only get stronger if the political condition does not deteriorate," he said.

He said that plans by the Indonesian Bank Restructuring Agency (IBRA) to sell some US$500 million during the second semester of this year should also bode well for the rupiah.

Halim added that the central bank would intervene in the market if it would be beneficial to create sentiment for the local currency.

Currency market analyst Farial Anwar said that the rupiah would remain under strong pressure due to the continuing domestic political uncertainty.

"As long as President Abdurrahman remains in power uncertainty will continue. This has created jitters in the financial market," he said.

There have been growing calls for Abdurrahman to step down following the legislature's censure, but supporters of the President have also continued to fiercely endorse him.

But Farial said that currency traders would not be too aggressive in pushing the rupiah below the Rp 9,600 level, fearing that they might make losses if IBRA does sell its $500 million.

"But at an exchange rate of Rp 9,500 per dollar, it's already a good level to buy dollars by indebted companies and importers," he said.

Farial also said that the new forex ruling would not significantly reduce the volatility of the rupiah because spot rupiah transactions between offshore banks and local banks was still permitted.

Farial dismissed suggestions that the recent stock market rally was fueled by offshore investors seeking an alternative investment domain following the halt in rupiah speculation activity offshore.

He believes that the surge in the stock market was fueled by locals returning their rupiah from overseas via foreign stock brokerages as there was no advantage in parking the local currency offshore following the introduction of the new forex ruling.

Meanwhile, some stock analysts have said that the recent stock market rally was primarily driven by foreign investors transferring their attention to stock markets in the region following another 0.5 percent cut in the U.S. interest rate.

They said that the Jakarta stock market has been attractive on a valuation basis because the stocks had dropped to a very low level. (rei)