Excess liquidity put pressure on rupiah

Excess liquidity put pressure on rupiah

Dadan Wijaksana, Jakarta

Aside from global concerns over a possible hike in U.S. interest
rates, the rupiah's sharp drop should also be blamed on excess
liquidity in the domestic banking sector, which has opened up
greater room to speculate against the local unit, according to
the central bank.

Bank Indonesia senior deputy governor Anwar Nasution said on
Friday the excess liquidity in the banking system was huge, "some
of which has been used to speculate against the local unit".

Anwar added that slow progress in corporate restructuring had
forced banks to avoid lending to the corporate sector, a
condition which in turn creates excess liquidity.

He said that the excess liquidity explained why the rupiah was
still under pressure at a time when other currencies in the
region had started to bounce back against the U.S. greenback.

"The corporate restructuring in countries such as Malaysia,
Thailand and (South) Korea is faster than that of ours. This
(slow restructuring) has limited bank lending, and thus caused
excess liquidity in the banks," Anwar told reporters, pointing to
the slow restructuring of indebted Texmaco Group and Dipasena as
examples.

Despite years of efforts, the debt restructuring in the two
firms -- which were among companies hit the hardest during the
late 1990s financial crisis -- is still no where near completion.

Lacking in its lending exposure notably to the corporate
sector, the banks then invested their huge funds in non-
productive investment such as government bonds, mutual funds and
the central bank's promissory notes auctions.

"And now, the banks are also playing in the currency market.
That's why BI is reviewing actions to be able to absorb that
excess liquidity," Anwar said, without elaborating.

Earlier, Bank Indonesia governor Burhanuddin Abdullah has said
that several banks, mostly foreign ones, have taken advantage of
the volatility in the local currency market by speculating
against the rupiah.

Suspected capital outflows, caused mostly by the widely-
anticipated rise in the U.S. rate, took the global currency
market by storm as many investors switched their assets in
emerging markets back to dollar-based assets.

The rupiah has dropped by around 9 percent against the dollar
this year, which makes it the worst performing currency in the
Asia region.

Although the dollar has recently started to depreciate
against many other currencies amid speculation of a possible
delay in the U.S. rate hike, the rupiah kept declining. Dealers
said that companies continued to buy dollars on fears that the
local unit might further decline. They need the dollar for
repaying debts and paying for imported goods.

Statements from the central bank and Minister of Finance
Boediono that the dollar in the medium term was likely to weaken
because of the U.S. twin deficits problem, seemed to be unable to
calm nervous companies.

The rupiah ended on Friday at Rp 9,290 per dollar, unchanged
from the closing level on Thursday -- the lowest level in 19
months.