Fighting currency speculators

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.