BI must hike rates, keep speculators in check: Analysts

Urip Hudiono, The Jakarta Post, Jakarta

With the rupiah continuing its slide against the U.S. dollar, the central bank must move more swiftly and aggressively in raising interest rates and tightening up the local forex market to protect it from speculative trading, analysts are saying.

The government, meanwhile, must also have the political courage to cut the country's costly fuel subsidies by increasing fuel prices.

Oil prices that are still hovering around US$66 a barrel have put pressure on the rupiah as the government needs more dollars to pay for oil imports amid rising fuel consumption and declining oil production. Further pressure has come from local companies, which also need more dollars to pay for their imports and service their foreign debts.

During last week's trading, not once did the rupiah manage to close below the psychologically sensitive Rp 10,000 mark, ending 4.1 percent down from the previous week at Rp 10,400 per dollar -- its lowest point since January 2002.

In his latest economic assessment, Standard Chartered economist Fauzi Ichsan outlined four measures that Bank Indonesia (BI) and the government must quickly take to prevent the situation from further worsening.

"BI should hike its one-month SBI rate to a double digit level from the current 8.75 percent," he said. "The central bank should also revise its recent regulation restricting short-term foreign investments in the country."

As for the government, Fauzi suggested a gradual increasing of fuel prices to cut fuel subsidies, and increasing the market's dollar supply by speeding up its Rp 4.5 trillion privatization program for state firms, despite the possibility of a political backlash.

"It is up to the authorities to act now," he said. "Given the circumstances, the government and BI have limited choices and may have to bite the bullet."

Fauzi's views were echoed by Citigroup economist Anton Gunawan, who said that interest rates needed to be further upped by at least 50 basis points (0.5 percent).

"The key to the depreciation of the rupiah is that BI has been very late in responding to increases in interest rates," Anton was quoted by AFP as saying.

BI hiked its reference BI Rate from 8.50 to 8.75 percent earlier this month, and its one-week overnight rate for banks from 7 percent to 7.5 percent. Its dollar deposit rate, however, still stands at 3 percent.

Higher interest rates help absorb market liquidity and boost the rupiah's attractiveness.

BI governor Burhanuddin Abdullah said last week that the central bank would soon increase interest rates again.

Currency analyst Farial Anwar of the Currency Management Group, however, questioned the effectiveness of increasing interest rates, and instead suggested a sterner crack down on speculators by tightening trading on the forex market.

"BI must particularly watch out for foreign speculators hitching on the back of local traders," he said.

"The government should reconsider its free forex trading policy, and oblige companies to repatriate their dollar export revenues."

BI is considering raising once again its reserve requirement for banks, which was last raised in June from 5 percent to between 6 and 8 percent, as well as lowering the ceiling for dollar transactions not backed up by underlying assets, after lowering it in July from $3 million to $1 million.

Farial also welcomed the government's idea of converting into rupiah up to $500 million of its $1 billion foreign exchange reserves held at the central bank to help boost the rupiah.