BI to maintain forex ruling despite protest

JAKARTA (JP): Bank Indonesia deputy governor Achjar Iljas said on Wednesday that the central bank would maintain its new foreign exchange ruling despite reports of protest and confusion among foreign banks.

"We'll maintain the new ruling ... Let's see how it goes," Achjar told The Jakarta Post, adding that the new policy had already been discussed with the International Monetary Fund.

Bank Indonesia announced earlier this week a new ruling which limits rupiah transactions between banks operating in the country and non-residents, in a bid to help curb speculation against the beleaguered local currency.

The new ruling, covered two substantial areas.

Firstly, it bans onshore banks from making certain transactions with non-residents, including foreign individuals and institutions.

Secondly, the ruling reduces the limit of forward transactions between local banks and non-residents to US$3 million from the previous $5 million limit.

A violation of the ruling by banks could lead to a temporary freezing of certain bank activities. But the ruling also provides time for banks to make adjustment.

Bank Indonesia has said that the new policy was not a form of capital control.

Nevertheless, the new ruling has created nervousness among foreign banks operating in the country.

Dealers also said that some offshore banks had stopped quoting the rupiah during the day until Bank Indonesia provided further clarifications regarding the changes.

Numerous analysts said that many foreign banks, which are active in foreign exchange trading, were concerned that the new ruling would severely reduce their earnings.

For many banks, foreign exchange transactions make a significant contribution to their revenue.

The rupiah ended higher late on Wednesday at Rp 9,400 per U.S. dollar, up from Rp 9,480 on Tuesday, as currency players cut long-dollar positions amid fears that the new ruling would inflate the cost of speculating against the local unit.

The rupiah was the worst performing currency in the region last year, depreciating by more than 25 percent against the U.S. dollar compared to the level in early 2000.

Bank Indonesia and government officials have said that one of the reasons for the fall in the exchange rate of the rupiah was due to speculative activity, not economic fundamentals.

The government has welcome the new central bank forex ruling.

Coordinating Minister for the Economy Rizal Ramli said that the new ruling would help curb speculation against the rupiah, which had been undervalued.

Under the new Bank Indonesia ruling, onshore banks are also prohibited from engaging in particular transactions with non- residents.

The prohibited transactions include: the provision of credit, overdrafts, in rupiah and/or foreign currencies; placement of funds in rupiah, including rupiah transfers to banks abroad; the purchase of securities in rupiah issued by non-residents; inter- office transactions in rupiah; and participations in rupiah with non-residents.

Derivative transactions in foreign currencies against the rupiah with non-residents, without any underlying transaction, have been restricted to a maximum nominal amount of $3 million, or its equivalent value in other currencies.

Bank Indonesia has said that the limitation on the derivative transactions only applied when the non-residents had no underlying transaction in Indonesia, such as investment in the real sector.

The ruling said that the restriction did not apply when carried out for the purpose of protecting the value (hedging) of investments, securities purchases, and credit provisions in Indonesia by non-residents.

The central bank has said that any changes which may need to be made to the maximum nominal amount of the derivative transactions would be stipulated in a Bank Indonesia circular. (rei)