BI predicts rupiah won't fall again

By Riyadi

JIMBARAN, Bali (JP): There should be no further fall in the rupiah as rapid depreciation over the past few weeks has corrected it, a spokesman for Bank Indonesia, the central bank, said here Saturday.

Speaking at a meeting of Southeast Asian foreign exchange (forex) dealers, Bank Indonesia Managing Director Paul Soetopo Tjokronegoro said market perception that the rupiah was slightly overvalued had triggered recent volatility.

"This overvaluation has certainly been corrected now by the depreciation we have experienced since July," Paul said in his keynote address.

He noted that the rupiah had fallen by some 20 percent in two months.

The rupiah ended on Friday at 2,970 against the U.S. dollar, up from 3,035 on Thursday.

"Indonesia retains some of the strongest economic fundamentals in the region and, from a domestic economic viewpoint, the rupiah need not depreciate further."

But Paul indicated that foreign investors and fund managers had shown little desire to differentiate between the different economies of Southeast Asia.

Therefore, it was possible that the market, over the short- term, would ask for further valuation adjustment in all regional currencies, he said.

As a result, Indonesia's situation would depend to a large extent on what happened in the rest of the Association of Southeast Asian Nations (ASEAN), he said.

"These misperceptions will persist until the market sees fit to analyze and weigh the strengths and weaknesses of each individual economy, and not make imprecise generalizations.

"Until then, fluctuations brought on by speculation will possibly persist."

Paul said regardless of the policy adopted to address rupiah volatility, it must have a root goal of maintaining the strength of macroeconomic fundamentals.

The free-floating exchange regime could actually help to maintain macroeconomic stability and offer the most accurate way of determining the true market value of the rupiah, he added.

Following the free-floating of the rupiah on Aug. 14, Bank Indonesia had taken several steps to contain speculative attacks on the rupiah, Paul said.

The central bank doubled its bilateral short-term certificates on Aug. 19 to drain excess rupiah liquidity in the market, thereby curbing speculative assaults on the rupiah.

And late last month, for instance, Bank Indonesia limited forward foreign exchange transactions, including swaps and options, by domestic banks to nonresidents to US$5 million per customer and depending on a bank's daily outstanding position.

"Let me point out that, by adopting this measure, we do not intend to single out nonresidents as the sole source of our current difficulties," Paul said.

He reiterated that the heavy pressure on the rupiah was caused not just by overseas fund managers but also many domestic corporates that were short in their dollar positions as a result of overconfidence in the rupiah rate.

"As a result of their short positions, when the rupiah was attacked, they panicked and scrambled to cover their positions by any and all means," he said.

Besides, there were also steps taken on a multilateral basis, especially by increasing cooperation among regional central banks.

"There are also discussions about expanding this cooperation to active policy coordination," he said at the opening ceremony of the dealers' meeting. "I suspect that you will see much more of this in the months ahead."

After the ceremony, central bank officials from Indonesia, the Philippines and Singapore held a closed-door meeting with Southeast Asian forex dealers.

The head of the monetary management department at Bank Indonesia, C. Harinowo, who represented the bank at the meeting, said no conclusions had been reached during the talks.

"We discussed what had happened lately and what steps we had taken to address this," Harinowo said. "There was nothing special in this meeting."

Unlike previous forex dealers gatherings, journalists were denied access to all meetings and seminars. The organizing committee did not provide any explanation for the change.

But Harinowo said: "I don't know why it was closed. For me, I prefer to be open. Maybe, the current situation makes this (meeting) sensitive."

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