Excessive forex trading margin hurting economy

JAKARTA (JP): Indonesia's high foreign exchange trading margin has created tough times for Indonesian businesses, bankers and businesspeople have said.

"The margin here is the highest in the world," former senior Central Bank official I Nyoman Moena said yesterday.

He pointed out that the margin caused difficulties in doing business in the country, including importing and exporting.

"In Indonesia, importers are generally exporters as well," he said, pointing out that imported raw materials were usually processed before being exported.

He said the costly foreign exchange trading spread between the bid and the offer price of U.S. dollars forced importers to buy the greenback at a very high levels, while the exchange rate for exporters' dollars was set at low levels.

Since the financial crisis hit the country in early July, the foreign exchange trading margin has widened. On Jan. 22, for instance, the buying rate for the U.S. dollar was Rp 11,800, while the selling price was Rp 10,500, reflecting a spread of Rp 1,300, or 12 percent.

The U.S. dollar is the most traded foreign currency in Jakarta, while other major currencies are relatively illiquid.

Moena also explained that the steep difference between the dollar's buying price and the selling price was one reason why the country's exporters were reluctant to unload their foreign exchange earnings despite central bank incentives.

Bank Indonesia (BI), the central bank, provides swap facilities so exporters can exchange their foreign currency earnings.

Not many companies use the facility.

"Confidence (in the government) is low," said an executive at a foreign exchange bank in Jakarta who declined to be named. He admitted that the high spread margin in foreign exchange trading was a major factor for the reluctance.

"This is ironic," he said, pointing out that the country badly needed U.S. greenbacks to help solve the current economic crisis.

Rumors have it that Indonesian conglomerates hold between US$80 billion and $100 billion in overseas banks.

"If such a large amount of foreign currency could be brought in, our foreign exchange reserves could approach the amount that Hong Kong has," he said.

Thailand floated the baht in July, initiating the region's economic crisis. Indonesia followed suit by abandoning BI's rupiah intervention band policy on Aug. 14, effectively floating the currency.

The private bank executive said that since BI floated the rupiah, trading volatility in the currency had increased.

"The high volatility has caused banks to increase their forex trading margin," he said.

He said banks had to anticipate unexpected price levels.

"The spread frequently changes in one trading day and differs from one bank to another," he said.

Foreign exchange trading is one of the banking industry's most lucrative businesses at present.

The rupiah nose-dived last month due to concern over the country's private sector foreign debt and rumors that Minister of Research and Technology B.J. Habibie would be appointed as the next vice president.

"The spread has increased to between Rp 1,000 and Rp 2,000," he said, adding that his bank's spread was Rp 500 Monday.

"The high spread also indicates a shortage of dollars in some banks," said the bank executive.

He said BI also may have forced banks, especially state banks, to set high margins to discourage people from buying dollars.

Moena said one way to narrow the foreign exchange trading spread was to curb speculators from buying and selling rupiah.

He expected BI's recent move to guarantee bank deposits and debts as well as limit the growth of foreign exchange deposits and liabilities would ease speculation.

"But that may not be enough," said the bank executive, pointing out that the rupiah would remain volatile unless domestic bank debt and foreign corporate loan problems were solved. (08)