BI's new plan seen as temporary fix

BI's new plan seen as temporary fix

The Jakarta Post, Jakarta

Bank Indonesia's plan to halt rupiah speculation in the banking
sector should be helpful in curbing the depreciation of the
embattled rupiah, analysts said, but only temporarily as the
policy did not address the root of the problem -- huge liquidity
in the banking sector.

With no concrete efforts being made to force the banking
sector to extend loans to the corporate sector (a move that would
reduce excess liquidity in the banking sector), the new Bank
Indonesia plan would not solve the real problems, which would
therefore reoccur in the future, said Aviliani of the Institute
for the Development of Economics and Finance (Indef).

"The move will definitely help, but for how long? This sort of
situation (excess liquidity) will continue forever unless
attempts are made to deal with the huge amount of excess funds in
the banks, which is basically the root of the problem," she said.

"What we need is an integrated attempt to push the banks to
lend more to the private sector. If this happens, we will no
longer need to worry about excess liquidity being used for
speculation against the rupiah."

With the banking sector still reluctant to significantly
increase its loan exposure to the private sector, Bank Indonesia
says that the country's banks at the moment are awash in excess
funds. While a significant part of these funds are invested in
the central bank's promissory notes (SBI), some has reportedly
been used for speculative dollar purchases.

To deal with this, Bank Indonesia announced plans to absorb
funds from the market to help prevent the ailing rupiah from
falling further. The national unit is currently hovering at more
than a 2-year low.

New measures will be introduced in the next two weeks,
including raising the minimum reserve requirements of banks and
broadening investment alternatives by enlarging the range of
financial instruments -- including selling new bills.

Central bank governor Burhanuddin Abdullah expects that
all these efforts will be capable of absorbing part of around Rp
40 trillion in excess liquidity.

It is hoped that the planned actions, coupled with other
measures already in place including market intervention, will
stabilize the battered local unit at around 9,000 per dollar.

The rupiah has so far lost about 11 percent since the start of
the year, making it the region's worst performing currency.

However, Anton Gunawan, a Citigroup economist, doubted the
moves would be effective in defending the rupiah, which he said
would continue on a roller-coaster course for at least a month as
sentiment would remain in favor of the dollar.

"In the next month, I think the rupiah will likely remain
under pressure as negative sentiment is still prevailing here,
mostly as a result of uncertainties regarding the U.S.
authorities' plans for an interest rate hike.

"There will also be domestic uncertainty, as well, at least
until after the presidential election," Anton said, adding that
the local unit would bounce back after that to around 9,000
toward the year-end.

Polling day for presidential election is July 5, with a
possibly second round on Sept. 20.