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.