Central bank limits rupiah transactions with foreigners

JAKARTA (JP) Bank Indonesia announced on Monday a new ruling which limits rupiah transactions between banks operating in the country with non-residents in a bid to help curb speculation against the beleaguered local currency.

Bank Indonesia deputy governor Miranda Goeltom said that the new ruling covered two substantial areas:

First, banning banks from making certain transactions with non-residents, including foreign individuals and institutions.

Second, reducing the amount of derivative transaction without any underlying trade transaction a bank can make with non- residents to a maximum level of US$3 million or its equivalent from the current limit of $5 million.

"But this (new ruling) is not a form of foreign exchange control. We still maintain our free foreign exchange system," Miranda told a press conference.

"The ruling is needed to help reduce the volatility in the exchange rate of the rupiah by cutting the supply of the local unit available offshore for speculative purposes," she added.

Miranda, however, admitted that other non-economic factors including domestic social and political conditions also influenced the rupiah.

The rupiah fared badly last year, dropping by more than 30 percent at the end of the year compared to the level in January. Amid continuing political uncertainty at home, some analysts have predicted that the rupiah could further drop to Rp 10,000 per U.S. dollar this year.

The rupiah managed to strengthen at Rp 9,470 per dollar late on Monday from Rp 9,600 on Friday following the announcement of the new policy.

The essence of the new Bank Indonesia ruling is as follows:

Domestic banks are prohibited from engaging in particular transactions with: citizens of foreign countries, foreign legal entities and other foreign bodies, Indonesian citizens with permanent residence status in a foreign country and not domiciled in Indonesia, representatives of foreign countries and international institutions in Indonesia, and offices of Indonesian banks or Indonesian legal entities overseas. These are categorized as non-residents.

The particular transactions prohibited include: provisions of credit, overdrafts, in rupiah and or foreign currencies, to the above parties (non-residents); placement of funds in rupiah with the non-residents, including rupiah transfer to banks abroad; purchases of securities in rupiah issued by non-residents; inter- office transactions in rupiah; and participations in rupiah with the non-residents.

Banks may conduct derivative transactions in foreign currencies against rupiah with the non-residents only up to a certain maximum nominal amount at all times, both for each individual transaction and for the cumulative derivative transaction position of each bank.

The maximum nominal amount both for each individual transaction and for the derivative transaction position (outstanding) of each bank is set at $3 million or its equivalent, and any changes that may be needed in the maximum nominal amount will be stipulated in a Bank Indonesia circular letter.

The derivative transactions restricted include forward sales such as tomorrow and spot currency transactions, rolled-over and synthesized as foreign currency forward sales; swap sales such as overnight swap and tom next (tomorrow's business day to the next business day); and or option transaction for selling foreign currency call or purchasing foreign currency put against the rupiah.

Miranda said that the limitation on the derivative transaction 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, including direct investment, securities purchase, and credit provisions in Indonesia by the non-residents.

"But if the above parties (the non-residents) make investments in Indonesia, they are welcome to make hedging (on their investments)," Miranda said.

"But there must be supporting documents with respect to the investment activities," she added.

"The value of derivative transactions may not exceed the value recorded in the supporting documentation."

The new ruling is retroactive as of Friday, but was announced to bankers only on Monday afternoon.

Miranda said that the new ruling had adjustment provisions.

Banks, which at the time the Bank Indonesia regulation was enacted, still have positions (outstanding) from fund placements or securities transactions are prohibited from rolling over such transactions.

With regards to the other transactions, banks were given between one month to 12 months to settle the transactions according to the new rules. (rei)