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.