BI to intervene as rupiah slumps

BI to intervene as rupiah slumps

Dadan Wijaksana, Jakarta

Bank Indonesia, which has been under pressure to stop the
battered rupiah from falling further, announced on Wednesday
plans to help stabilize the local unit as it plunged to near the
Rp 9,600 per dollar level.

Bank Indonesia Governor Burhanuddin Abdullah said during a
press conference that the planned measures, to be implemented in
the next two weeks, would focus on absorbing the huge excess
liquidity from the market to help curb speculation against the
local currency.

He said that the moves could include raising bank reserve
requirements and introducing new financial instruments to allow
the central bank to borrow more money from commercial banks.

Burhanuddin did not provide details about the new policy.

The current bank reserve requirements stipulate commercial
banks to keep at least 5 percent of their rupiah deposits at the
central bank and 3 percent of their dollar deposits.

Plans to issue new financial instruments will include the
creation of a 7-day "intervention rate," under which the central
bank will borrow rupiah from commercial banks for a week at 7
percent interest, which is the same as the existing overnight
intervention rate. A longer maturity period for central bank
promissory notes (SBI notes) is another option. Currently, Bank
Indonesia only issues the one-month SBI notes and the three-month
SBI notes. There is a possibility that the central bank will
issue six-month SBI notes.

Burhanuddin explained that "excess liquidity is one of several
factors suspected as a reason for the pressure on the rupiah.
These plans will reduce the local currency's volatility and we
hope it will eventually stabilize at about Rp 9,000."

Such actions were expected to absorb part of the Rp 40
trillion worth of excess liquidity in the financial system,
Burhanuddin said.

The rupiah has been the worst performing currency in Asia of
late.

On Wednesday it plunged to as low as Rp 9,590 per dollar, the
lowest level since April 2002. The central bank was forced to
intervene by selling dollars, which helped the local unit to end
higher at Rp 9,470.

The falling rupiah will push inflation higher as imported raw
materials will become more expensive for local companies. The
higher inflation will not only push interest rates higher, but
also undermine consumer purchasing power. Low interest rates and
strong domestic consumption have been the major driver of the
country's economic growth over the last two years.

The rupiah has been hit not only by the prospects of a hike in
U.S. interest rates, but also by concerns over the domestic
political situation as presidential campaigning began on Tuesday.
Voting day is July 5 and a possible run-off is scheduled for
Sept. 20.

In addition to worries of political violence in the country's
first direct presidential election, the lengthy six-month process
(starting with legislative election in April) has forced to
investors to delay investment plans.

Meanwhile, some analysts doubted the effectiveness of Bank
Indonesia's planned action.

Fauzi Ichsan, a StanChart economist, said that the rupiah
would remain under pressure if there were no clear efforts to
improve the market sentiment. He predicted that weak sentiment
would continue at least until the completion of the presidential
polls.

Burhanuddin also that despite the sharp drop in the rupiah,
the central bank had no plans to introduce drastic actions such
as applying currency controls.

"There's no plan to change the current open, capital-account
regime and floating exchange rate," he said.