Central bank limits rupiah transactions with foreigners

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)