Forex restriction

Forex restriction

We can expect an eased monetary measure within the next few
days after the central bank imposed some restrictions on forward
foreign exchange selling against the rupiah. The ruling,
effective as from Saturday but was announced to the mass media
only yesterday, limits forward forex transactions from domestic
banks to non-resident (foreign) customers with the maximum
transaction limited to US$5 million per customer and per bank.

The monetary authorities seems to be afraid of a new wave of
speculative attacks on the rupiah once the tight monetary measure
imposed on Aug. 19 is relaxed. But since the money squeeze is
worsening the business uncertainty and increasing the risk of
leading the whole economy into recession and even stagflation,
the central bank should act soon to start gradual easing of the
credit crunch. The restrictions on forward forex transactions
could act as a deterrent to a new about of fierce currency
speculation once the tight monetary measure is eased.

Even cabinet ministers have joined businesspeople and
analysts in expressing great concern at the havoc wreaked on our
economy by the wildly fluctuating rupiah and the attendant money
squeeze. They were afraid the monetary authorities had overshot
their tight monetary measure. State Minister for Investment
Promotion Sanyoto Sastrowardoyo, speaking Friday after a meeting
with President Soeharto, said he was extremely disturbed by the
present uncertainty as it was obstructing investment activities.

Coordinating Minister for Political and Security Affairs
Soesilo Soedarman had voiced similar alarm on Thursday. While he
said that he fully realized and supported the objective of the
credit crunch, Soesilo cautioned that too much of such a drastic
measure could drive many small and medium-scale businesses into
bankruptcy. As the minister in charge of overseeing political
stability, Soesilo clearly foresees the threat of political
instability that could be a side effect of the monetary shock
therapy.

It is now almost three weeks since the nation's economy was
thrown into the turbulent sea of a violently fluctuating currency
following the floating of the rupiah on Aug. 14, and two weeks
after much liquidity, the economic lifeblood, was squeezed out.
Nobody knows how long these tough tactics should be applied,
especially as the rupiah has yet to settle at a fairly stable
trading range.

We can count ourselves fortunate, though, that the market
remains fully stocked with basic daily necessities and their
prices have not spiraled along with the rupiah. Theoretically,
there is no reason for prices of basic food commodities (except
wheat flour which is entirely imported) to rise steeply as long
as stocks are adequate and their distribution is smooth. But this
stability in the food sector could eventually be undermined.
Members of the public, with ebbing confidence in the economy, may
start panic hoarding if the current business uncertainty persists
much longer.

Many analysts said the rupiah's decline last week was no
longer driven by internal factors, but instead blamed the steady
depreciation on the impact of the regional contagion as the
ringgit came under fierce speculative attacks. This argument was
puzzling to us.

Contagion effects are supposed to trigger only short-lived
selling pressures by undiscriminating investors with herding
behavior. Regional spillovers should have been transitory in the
absence of significant changes in economic fundamentals.

Too much damage has been incurred by the shock therapy. The
market value of companies listed on the Jakarta Stock Exchange
has plunged by more than 30 percent, resulting in a huge loss of
Rp 80 trillion ($27 billion). Allowing the economy to suffer much
longer due to lack of liquidity, its lifeblood, risks destroying
economic fundamentals and driving the whole economy into a long
period of not only recession but also stagflation.

The government should be commended for its strong consistency
in the free foreign exchange regime despite the grave currency
crisis we now face. We don't see the restriction on forward
transactions as a reverse of the open capital account policy. Nor
would the measure be detrimental to investor confidence because
transactions for investment in Indonesia and for export-import
needs are exempted from the restriction.