Jakarta mulls stricter capital controls
Jakarta mulls stricter capital controls
SINGAPORE (Dow Jones): Despite Indonesian government statements to the contrary, Jakarta is probably mulling stricter capital controls to prevent the rupiah spiraling down any further.
This, say analysts, is the only policy option that would have any lasting, uplifting effect on the currency, which at one point yesterday had fallen more than 13 percent against the dollar so far this month.
Though political instability and violence in the troubled resource-rich province of Aceh were undoubtedly the catalyst for the plunge in the rupiah, the introduction Jan. 15 of new curbs limiting the availability of rupiah offshore - described by some analysts as a form of capital controls - is at the root of the currency's problems.
The restrictions effectively killed offshore trade and worsened an already dismal balance of payments position by further distancing Jakarta from the International Monetary Fund, which continues to delay the disbursement of a crucial $400 million loan tranche.
The loan is more significant than its mere dollar value.
Before bilateral and multilateral creditors agree to restructure and rollover the billions of dollars in sovereign debt maturing each month, they want the administration of President Abdurrahman Wahid to undertake economic and corporate reforms attached to the IMF loan.
In particular, the IMF is opposed to new legislation that it feels might curb the independence of the central bank and it wants Jakarta to cancel borrowing mandates of the provincial governments.
The agency also wants greater transparency in the operations of the Indonesian Bank Restructuring Agency (IBRA), which is charged with resurrecting the nation's embattled banking sector. Although an IMF official in Washington expressed hope Monday of further progress on talks with Indonesia, the Fund isn't likely to extend the new loan any time soon.
Credit shock
With this is mind, Barclays Capital expects the government will take a two-pronged strategy in a bid to arrest the rupiah's slide.
"We expect the government's answer to a growing fiscal and balance of payments crisis will be a broad-based debt restructuring or default, and stricter capital controls" that would make it harder for investors to get capital out of the country, it says in a research note.
A debt standstill would aid the rupiah as outflows to service foreign debt are a key source of weakness. Last year, this meant a $28 billion trade surplus became a mere $8 billion current account surplus.
Curbs on capital outflows from Indonesia would tighten existing rules that allow investors to move funds offshore but restrict the ability of foreigners to borrow rupiah offshore, making it almost impossible for them to "short" the currency.
Barclays says the double-barreled approach may give Bank Indonesia more leeway to monetize part of public debt - that is buy back the debt, pushing bond yields down, and flooding the commercial banking system with cash - without the rupiah spiraling out of control.
"Therefore we continue to warn the market of what we fear will be a coming credit shock in Indonesia," says Barclays.
The spark for this financial wildfire is, as usual, politics.
Though the rupiah plunged during the Asian financial crisis of 1997-98, it was the resignation of President Suharto in May 1998 after months of protests, riots and bloodshed that triggered the currency's capitulation to an all-time low a month later of Rp 17,000 to the dollar.
The surge of the dollar Monday to an intraday high of Rp 11,500 from a close last week around Rp 10,000 was reminiscent of those dark days, and without an end to political turmoil - moves to impeach Wahid continue - and civil unrest, the outlook for the currency will remain bleak.
"The risks remain high...and Bank Indonesia has limited options to defend the currency," says DBS Bank analyst Wong Chee Seng. The dollar is set to head toward Rp 12,500-13,000 in the medium-term, says Wong.
Traditional options
More traditional options to defend a currency are not available to the central bank because: foreign currency reserves at $29 billion are limited and only modestly more than the $26 billion in external debt maturing this year; and steep rate hikes would hurt local banks.
So even though dollar sales by the central bank and an interest rate hike may have helped the rupiah stage a mild rebound to around Rp 10,400, the respite likely will be short- lived.
Indeed, Bank Indonesia Deputy Governor Anwar Nasution conceded the central bank's ability to support the rupiah through intervention is limited, as the catalyst for the fall is mainly political instability.
Also not helping the currency are ill-advised, though perhaps accurate, remarks from government officials.
Chief Security Minister Susilo Bambang Yudhoyono Monday warned of the nation's collapse if "questions over the national leadership, stability and security are not quickly resolved."
Alluding to the House of Representatives impeachment process, Yudhoyono said the uncertainty could last until July or August, which, even with radical policy action, would be disastrous for the rupiah.
And the violence and social unrest in Aceh is starting to have a real effect on the economy, says Simon Flint, currency strategist with Bank of America in Singapore. Energy companies Exxon Mobil Oil Indonesia Inc., PT Arun NGL, and Pertamina all report partial or total shutdowns of operations in the strife- torn province, which accounts for more than 4 percent of national gross domestic product.
A further break down in social order across the archipelago may increase security risks in neighboring countries, which have so far escaped much of the economic downdraft from Indonesia this time because Indonesia is viewed as a special case, rather than the norm in Asia.
In light of these extraordinary circumstances, assurances from Senior Economics Minister Rizal Ramli that the government won't resort to capital controls in its bid to support the rupiah might reasonably be viewed with a little skepticism.