End of BI swap facilities won't affect forex mart

End of BI swap facilities won't affect forex mart

JAKARTA (JP): Bank Indonesia's move yesterday to end its
foreign exchange swap facilities for the banking industry is not
expected to have any major impact on the foreign exchange market.

Rusli Suryadi, the vice president of Bank Bali, said that the
impact of Bank Indonesia's move would be insignificant because
the larger part of swap transactions already take place outside
the central bank system.

The central bank abolished, beginning yesterday, swap
facilities for the banking industry in a move to give commercial
banks a greater role in foreign exchange dealing.

"In the long-term, yes, especially when there is an unexpected
event in the country's economy," Rusli told The Jakarta Post. of
the possible speculative impact of the central bank's move on
foreign exchange dealing.

He said that the abolition of the central bank's swap
facilities was in line with the globalization trend in the
financial sector.

Rusli said the decision was also a natural consequence of the
greater role being played by commercial banks in foreign exchange
trading.

He said that the central bank's swap facilities are, in fact,
no longer popular among banks because of their high premium
rates, which are approximately one to two percentage points above
those charged on inter-bank transactions.

"It is, therefore, natural for the central bank to end the
facilities," he said.

The premium rates charged by Bank Indonesia for the swap
facilities for six-month maturity was around 10.75 percent per
annum last week, as compared with roughly nine percent charged by
commercial banks for similar facilities.

A foreign exchange dealer at a foreign bank said that the
short-term impact of the abolition of Bank Indonesia's swap
facilities was likely to be minimal.

Rupiah

The source, who requested anonymity, acknowledged that a
number of Singapore-based investment fund managers had bought
more rupiah early yesterday in anticipation of an increase in the
value of the rupiah as a result of the central bank's move.

"But their maneuver received no response from the market and
they then released their rupiah in the afternoon," he said.

He said that speculative trading, as a side effect of the
freer swap system, would take place only when there was
uncertainty regarding the country's economy, such as when there
was a sharp drop in the price of oil, Indonesia's major export
earner.

He added, however, that in such exceptional conditions the
central bank would be ready to reintroduce the facilities or take
similar action to curb speculation.

Bank Indonesia introduced swap facilities in 1979 to help
commercial banks hedge the foreign loans of their customers from
a possible sharp fall in the value of the rupiah against the U.S.
dollar.

Bank Indonesia said in a statement over the weekend that the
government's commitment to adopt a more market-oriented system
had significantly reduced the dominance of the central bank's
foreign exchange activities in the last 10 years.

The swap transactions of the central bank, for example,
dropped sharply to US$1 billion last year from over $13 billion
in 1971 as a result of the central bank's more market-oriented
policies, the statement said.

By contrast, it said, the swap transactions carried out by
commercial banks had sharply increased to $85 billion from $29
billion during the same period.

Banking analysts said that the central bank's move to give
commercial banks more independence was timely.

Rijanto, a noted local banking analyst, said that the central
bank's move would discourage commercial banks from raising
offshore funds because a large amount of foreign exchange would
no longer receive significant protection in the absence of the
central bank's swap facilities.

He said that the central bank's move could also cause an
increase in the swap premium rates on inter-bank transactions,
which at present range between six and nine percent per annum.
(hen)