Central bank begins SBI auction today

JAKARTA (JP): Bank Indonesia plans to start the weekly auction of one-month promissory notes (SBIs) today and expand it to a full range of maturities as agreed with the International Monetary Fund.

Currency dealers and analysts said the move would be the central bank's first step in allowing interest rates to be fully determined by the market.

"The auction will eventually lead to real market rates, which should be lower than the current level," a chief dealer with a local private bank said.

He said banks with excess liquidity would not be able to place all their funds in SBIs through the auction. These banks would start offering lower rates to depositors.

In this time of crisis, when lending to corporations is nonexistent, sound banks would continue to offer rates lower than SBI rates.

Under the new system, the central bank will announce its auction target every Tuesday. Those who want to participate in the auction must place their offers on the next day for settlement the day after that.

Dealers said yesterday Bank Indonesia was offering Rp 13 trillion (US$955 million) in one-month SBIs for today's auction. Banks wanting to participate in the auction have to place their offers today from 8.00 a.m. to 2:00 p.m. Jakarta time.

Unlike the previous system, in which only 21 primary dealers could participate, all banks are now allowed to participate for their own or third-party interests provided they still maintain a positive balance at the central bank.

Bank Indonesia director Miranda S. Goeltom said yesterday that to enhance the attractiveness of the SBI auction, the central bank offered a window facility for banks participating in the auction in the form of an SBI repurchase system.

"Banks could suddenly face liquidity problems due to unexpected internal or external factors. If that happens, there must be a window for them to get liquidity, especially if they cannot get it from the interbank bank.

"If we don't' (give this window facility), interest in the auction of one-month SBIs could be less than satisfactory," Miranda told TVRI last night.

In addition to the SBI auction, bankers said, Bank Indonesia was maintaining intervention measures in the money market if the auction failed to absorb the targeted amount.

They said the central bank could step into the money market between 8 a.m. and 4 p.m. by selling treasury bills to drain excess liquidity based on prevailing interbank rates to meet its monetary target on the same day of settlement for all transactions.

While the regular auction would operate on longer-term targets, the intervention policy would adjust its short-term goals.

Local financial market analyst Iskandar Rusnawie predicted that today's auction would result in interest rates lower than the benchmark one-month SBI rate of 58 percent.

"I suspect we have masses of excess rupiah liquidity in the market. And through the SBI auction, BI will drain those excess liquidity without giving interest incentives as even without such incentives, those who have money will still buy SBIs due to their zero risk," Iskandar said.

He predicted that BI would even intervene in the money market with lower rates.

Some currency analysts warned, however, that the auctioning of SBIs, which would result in lower rates, would increase pressures on the beleaguered rupiah.

Iskandar, however, disagreed and said that the rupiah would instead strengthen in line with the central bank's move to absorb excess liquidity of up to one-month maturity.

A local bank dealer supported Iskandar's argument and said that the rupiah was currently undervalued due to concerns about social security and political uncertainty.

"I think 50 percent of rupiah's weaknesses is caused by these social and political concerns. Once these concerns are resolved, the rupiah will strengthen to a more realistic level," he said.

The rupiah closed at 13,500 against the U.S. dollar in the Jakarta spot market yesterday, compared to 2,450 in early July last year. (rid)