NDF market poses a threat to rupiah

NDF market poses a threat to rupiah

SINGAPORE (Dow Jones): In defiance of Bank Indonesia's recent
moves to curb speculative trading in the rupiah, a handful of
major foreign banks in Singapore have agreed to start trading
rupiah non-deliverable forwards from Monday, dealers said on
Thursday.

An offshore interbank non-deliverable currency forward market
could make the rupiah vulnerable to speculative attack - as it
was until a month ago, when the central bank essentially shut
down offshore trade in the currency.

The new market, beyond Bank Indonesia's jurisdiction because
settlement would be in dollars, might allow arbitrageurs to
capitalize on discrepancies in NDF and onshore rates, putting the
rupiah in a dangerous position given the smoldering social and
political problems in Indonesia.

"It opens the door to a lot of arbitraging - onshore players
can arbitrage between the spot market and the NDF market," says a
dealer at a foreign bank in Singapore. "It is definitely going to
drive the spot (dollar against rupiah) market higher."

In Jakarta Bank Indonesia Deputy Governor Miranda Gultom
commented on Thursday that the new market would have an impact on
the rupiah.

But she declined to provide further explanation.

Miranda said Bank Indonesia can't stop overseas banks from
trading rupiah via the non-deliverable market as they are outside
the central bank's jurisdiction.

Pardi Kendy, a Jakarta-based director at PT Bank Buana
Indonesia, said, "This is going to bring volatility back on the
rupiah. At the initial stage it will create two prices - offshore
and onshore. I expect the offshore market price will be higher
than the onshore market. This will give an opportunity to
arbitrageurs to take advantage of the difference. Excessive
volatility may upset Bank Indonesia."

The step by the foreign banks is important not only for
Indonesia but also because it might set a precedent for how
bankers respond to regulatory changes in other nations in
Southeast Asia as well.

For example, the Thai central bank is scheduled to meet with
bankers on Friday to discuss baht trading regulations. Some
dealers speculated on Thursday that foreign bankers would
consider setting up a baht NDF market if Thai authorities
announce drastic measures to curb offshore trading in the
currency.

A non-deliverable forward market involves trading in a
currency based on different forward rates calculated by interest
rate differentials.

Because settlement is in dollars, such trading is thought to
lie beyond the jurisdiction of local central banks.

In Asia, there are non-deliverable forward markets for the
South Korean won, New Taiwan dollar, Philippine peso, Indian
rupee and Chinese yuan.

There are also concerns Bank Indonesia might respond to the
new market by going a step further in its effort to clamp down on
speculation.

Some fear Indonesia could resort to Malaysian-style capital
controls if the new NDF market damages the rupiah, although
Jakarta's commitments to the International Monetary Fund would
make this scenario unlikely, others said.

In September 1998, Kuala Lumpur pegged the ringgit at MYR3.80
to the dollar and the regime has remained in place ever since.

Bankers began discussing a non-deliverable currency forward
market to replace spot rupiah trading shortly after Bank
Indonesia announced Jan. 15 that it would deny speculators access
to funding for short rupiah positions. As a result of the central
bank's regulations, banks outside Indonesia can no longer buy or
sell rupiah among themselves.

The move Thursday came after bankers finally agreed at a
meeting late Wednesday on technical aspects of the new market,
including the point of reference for fixing rates, sources told
Dow Jones Newswires.

Banks will post their quotes on the Association of Banks in
Singapore's fixing page on Bridge Telerate page 50157, dealers
said, adding that the tenor of the contracts will extend out to
six months.

"We anticipate that over time there will be approximately four
to eight participating banks and anticipate that the initial size
of the transactions will be up to $2 million," said a source at a
European bank.

Despite the news of this latest development, the rupiah held
steady Thursday around IDR9,600 to the dollar.

Dealers said there is keen interest to trade rupiah NDFs,
although the market will likely evolve slowly.

"A lot of people didn't want to trade dollar-rupiah because of
the capital risks, but there's actually a lot of interest to
trade or hedge the rupiah offshore," said a dealer at a U.S.
bank. "It will be a slow start, but after a few months, it
certainly will pick up."

Indeed, most of the banks behind the genesis of the rupiah NDF
market were already offering NDF rates arbitrarily at the request
of their customers in recent weeks.