BI forex ruling diverts speculators into stocks

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)