Central bank begins SBI auction today

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)