Indonesia's forex curbs a help or a hindrance?

Indonesia's forex curbs a help or a hindrance?

SINGAPORE (Reuters): As foreign banks struggle to get to grips
with Indonesia's curbs on offshore rupiah trading it is becoming
clear the new rules could well backfire and hinder the currency
more than help it.

Bankers said the new set of restrictions, aimed at limiting
offshore players' ability to get hold of rupiah to sell short in
speculative plays, have effectively sealed it within Indonesia's
borders and killed the offshore market.

On Jan. 15, Bank Indonesia banned rupiah transfers from local
banks to non-residents, and lowered the limit on forward
transactions with no underlying investment purpose between local
banks and non-residents to US$3 million, from $5 million.

Dominique Dwor-Frecaut, director of research at Barclays
Capital, said in implementing the measures Bank Indonesia had
"shot itself in the foot."

"It's actually negative because the domestic economy in
Indonesia is basically dead and the export sector is alive only
because it's keeping its money offshore," she said.

She said restrictions on offshore trading would further hurt
business confidence and slow private inflows, the consequences of
which could be "devastating" for Indonesia's already fragile
underlying balance of payments position.

The new rules failed to stop the rupiah slipping the wrong
side of 9,500 on Thursday as students took to the streets calling
for the resignation of President Abdurrahman Wahid who is facing
likely impeachment proceedings on corruption charges.

Traders said it was not a case of the rupiah being under
attack by offshore players, but Indonesia's violence-prone
politics had dragged it down 25 percent against the dollar last
year as confidence in the country evaporated.

On top of this, there was genuine onshore demand for dollars
primarily to meet repayments on $140 billion foreign debt, almost
half of which is owed by local corporates.

"With no change in the fundamental political or economic
situation, no curbs or restrictions are likely to work," head of
research at a European bank in Singapore said.

"Reducing the complexity and availability of hedging
instruments and the breadth of a market is always bad. It gives
investors a wrong signal that perhaps they are trying to hide
something," he added.

Dealers said offshore rupiah holdings have swelled in the past
few years as the political situation deteriorated.

They said apart from foreign investors most exporters, who are
also importers of raw materials, use the offshore market for
financing and hedging needs and not all of their activity in the
offshore market could be termed investment activity.

"It was the lack of confidence in the country's political and
economic environment that drove even resident business to seek
the safety of the offshore market and make some extra money," the
chief dealer of a U.S. bank in Jakarta said.

Dealers said most offshore banks and individuals would
eventually seek to convert part or all of their estimated $600
million to $1 billion onshore rupiah holdings into dollars. That
could in itself exert a lot of pressure on the rupiah.

"This is the reason IBRA (Indonesian Bank Restructuring
Agency) has timed its ($500 million) dollar sale at around mid-
February to offset that pressure," said a senior currency
strategist at a U.S. bank in Singapore.

Meanwhile, Dow Jones Newswires reported banks in Singapore
have agreed on a benchmark by which they can choose to offset all
their outstanding rupiah transactions with other counter-parties
offshore, following Bank Indonesia's tighter foreign exchange
rules.

The Association of Banks in Singapore have agreed to use the
closing swap rates on Bridge Telerate page 50157, which were
quoted as at Jan. 11, dealers said.

Officials from the Association of Banks in Singapore weren't
immediately available for comment.