BI restricts foreign exchange trading at $5 million

JAKARTA (JP): Bank Indonesia (central bank) moved over the weekend to limit forward foreign exchange trading to US$5 million to confine speculative dollar buying.

Central bank governor J. Soedradjad Djiwandono, said yesterday the government had decided to limit forward foreign currency trading by domestic banks to nonresident customers at US$5 million per customer and per bank's outstanding position.

"An exception from that limitation will only be given to swap transactions for investment in Indonesia and export-import (needs)," the governor said.

The decision came into effect on Aug. 29.

Soedradjad defined "nonresident customers" as bank and nonbank customers.

He said local banks which had exceeded the limit would not be allowed to enter forward transactions until the outstanding amounts were reduced to below the permitted level.

Most banks held forward positions well in excess of the $5 million limit and they would take time to unwind, foreign exchange dealers said.

They said the move would effectively kill the forward market and temporarily stabilize the rupiah.

Forward exchange transactions are purchases or sales of foreign currencies at an exchange rate established at the time of the deal but with payment and delivery at a specified future date.

Under the central bank's ruling, a forward transaction includes any selling of foreign currencies against the rupiah with more-than-two-day payment and delivery.

This also includes spot transactions which are rolled over as well as forward transactions to sell foreign currencies in the framework of swap and options transactions.

Rupiah, like other regional currencies, has come under fierce speculative attacks following de facto devaluations of the Thai baht and the Philippine peso in July.

Bank Indonesia, in its first move following the attacks, widened its now defunct intervention band from 8 percent to 12 percent to make speculation on rupiah more expensive.

But the widening band was not effective to appease speculation. After intervening in the market with $1.5 billion, Bank Indonesia decided to float the currency on Aug. 19.

After the floating, the rupiah suddenly fell to an historic low of 3,045, which prompted the central bank to squeeze rupiah liquidity and raise interest rates to discourage speculative dollar buying using cheap rupiah.

The rupiah recovered briefly to 2,650 after the central bank squeezed liquidity by raising the central bank's certificate (SBI) rates to as high as 30 percent for one-month paper, stopping to discount money market securities and forced state companies to convert their deposits to the central bank's papers.

But the currency continued to fluctuate, dropping to the same level before the central bank imposed the credit crunch, and even touched a new historic low of 3,070 last Friday before easing to 2,900 level.

Some dealers said the central bank's newest move of limiting forward transactions would not stop the rupiah from weakening further. It would only slow down the process. (rid)

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