Fighting currency speculators

Starting on Thursday foreign exchange derivative transactions against the rupiah will be limited to US$1 million, down from $3 million, and dollar purchases in outright forward transactions and swaps will also be capped at $1 million.

These measures were outlined in a ruling issued by Bank Indonesia, which also imposed a three-month minimum investment hedging period on foreign exchange transactions. This means that investors with underlying investments in Indonesia must keep their funds in the country for at least three months. Hedging transactions subjected to this new regulation include outright forward transactions, swaps, and call and put options.

This is one of several measures introduced over the past few weeks to prevent wild volatility in the rupiah by reducing speculative elements in the currency market. One of the goals of these measures is to decrease the inflow of "hot money" into the country. The central bank apparently noticed that foreign exchange movements, which at one time last week saw the rupiah at a three-year low against the dollar, were not wholly related to genuine underlying needs, but were triggered partly by speculative trading.

The government and Bank Indonesia reached a joint arrangement last week, whereby the central bank will directly supply the foreign exchange needs of state oil and gas company Pertamina to import crude oil and oil products, while other state-owned companies will purchase dollars from designated state banks.

A more drastic measure being prepared is a regulation that would oblige all exporters to repatriate their export earnings to banks in Indonesia. This policy is seen as capable of increasing the country's foreign exchange reserves to a level that they can act as a potent deterrent against currency speculation.

The rationale for this regulation is that Indonesia posts a foreign trade surplus of about $2 billion a month, but only a tiny portion of this surplus flows back into the country to replenish its foreign exchange reserves because exporters keep the bulk of their export revenue at overseas banks.

No details were immediately available on the mechanisms for the repatriation of export earnings, but chief economics minister Aburizal Bakrie said more than 100 countries obliged exporters to bring home their export earnings. This arrangement is by no means a form of foreign exchange control, because exporters can still hold their export revenue in whatever foreign currency they choose.

Whether all of these foreign exchange measures will be able to beef up the rupiah to a level that fully reflects the economic fundamentals of the country depends on how the market perceives the credibility of the policies and the capability of the central bank to execute the measures.

The planned regulation on the compulsory repatriation of export earnings is an especially sensitive issue. This policy could, for example, be seen as an ominous signal for a stricter form of foreign exchange control if exporters are required to place their export earnings in specific domestic banks.

Most private-sector exporters certainly feel more comfortable putting their export earnings in foreign banks because this makes it easier for them to open letters of credit for their deals with foreign parties.

How the mechanisms on the repatriation of export earnings are designed is therefore the key to determining whether exporters will believe the measure is genuinely aimed at building up the country's foreign exchange reserves, or is rather a first step toward a system of foreign exchange control.

The government can simply force state-owned companies to implement the repatriation policy. However, private-sector exporters could undermine or circumvent the policy by under- invoicing their exports.

Several Latin American countries that imposed foreign exchange controls in the 1980s felt compelled to hire reputed surveyor companies such as Switzerland's Societe Generale de Surveillance (SGS) to verify export documents, because many companies were under-invoicing their export earnings to allow them to keep a good portion of their export proceeds overseas. The Indonesian government employed SGS from 1985 to 1995, but to verify imports at points of loading to prevent under-invoicing by importers to reduce import duty payments.

The government and Bank Indonesia should see to it that companies view the repatriation policy as credible. This, of course, could be difficult given the reputation of our government institutions for technical incompetence and of our government officials for venality.