BI restricts foreign exchange trading at $5 million

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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