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.