Curbing rupiah speculation

Curbing rupiah speculation

Frustrated with the decline in the rupiah's exchange rate to a
level considered way below the economic fundamentals, Bank
Indonesia moved on Monday to cut sharply the supply of the local
unit which could be used for speculative purposes.

However, the market seemed to accept the measures quite well
as the central bank stopped short of taking any form of foreign
exchange control which, since last year, it had been rumored to
flirt with. Any tinkering with the open capital account policy is
considered virtual suicide now, given the country's heavy
reliance on foreign aid and trade, and any drastic move is also
considered unfeasible for the government's administrative
infrastructure. Moreover, any form of foreign exchange control
will not be acceptable to the International Monetary Fund which
is leading a multi-billion dollar bailout for Indonesia.

The main essence of the latest policy measures is to slash the
supply of rupiah that could be used for speculative purposes by
banning domestic banks from lending rupiah or foreign currencies
to non-resident borrowers, including foreign citizens and foreign
legal entities, as well as Indonesians with permanent residence
status abroad and overseas offices of Indonesian legal entities.
This ban is in fact the reinforcement of an old rule which seemed
to have been ignored.

The other measure involves the cutting down to US$3 million
from $5 million the maximum amount that domestic banks can make
in forwarding currency deals offshore. But this restriction will
not adversely affect foreign trade and investment because it does
not apply to hedging deals by foreign investors and creditors and
derivative transactions which have underlying deals in Indonesia.

The central bank apparently is fully aware that any major
outright limitations to the movement of currency would only
create policy uncertainty and threaten capital inflow. Moreover,
corruption and inefficiency within the government bureaucracy
would make such a measure counter-productive.

This reason, we think, is also the major factor that has
prompted the central bank from not making it compulsory for
Indonesian exporters to expatriate their overseas earnings, an
option that had earlier been suggested by several economic
ministers, analysts and businesspeople.

Monday's measures are only the latest in a series of moves
launched by the central bank to help control wide volatility in
the rupiah rate. Last October, the central bank tightened its on-
site supervisory presence at banks which were quite active in
foreign exchange trading in order to better monitor the demand
for foreign exchange.

Earlier last February, Bank Indonesia required banks to file
monthly reports to the central bank on their foreign exchange
transactions. Reports on individual foreign exchange deals
amounting to figures in excess of $10,000 must contain more
specific details such as the type and purpose of the transaction
and the relations between the counter parties. This reporting
requirement is designed mainly to keep the central bank apprised
of foreign exchange flows in order to enable it to conduct and
improve its monetary management.

But the monetary authority is also sensible in realizing that
all these measures would not stop rupiah speculation outright but
would at least help reduce the volatility of the rupiah rate.

The central bank fully realizes that speculation on the rupiah
will remain highly active, and even Indonesian citizens will
regularly shift from rupiah to a foreign currency position as
long as the sovereign risks remain high due to political
uncertainty.

But the latest moves are expected to reduce the supply of
rupiah overseas that could be used for speculative purposes,
especially now that many domestic banks are awash with liquidity
but are still hesitant on resuming significant corporate lending
due to the current major political and economic woes.