Offshore banks choke RI of U.S. dollars

Offshore banks choke RI of U.S. dollars

SINGAPORE (AFP): Offshore banks operating out of Singapore and Hong Kong are choking the supply of precious U.S. dollars to Indonesia as they fear a banking collapse in Jakarta on the weight of staggering debts, bankers and analysts said yesterday.

The foreign banks were cutting off credit lines to local banks in Jakarta, where bankers said an informal three-tier foreign exchange market was taking shape amid dimming hopes the Indonesian rupiah would emerge from the abyss.

Indonesia's offshore banks were dealing among themselves on one side of the market while the other part was divided among the few problem-free local Indonesian banks and the local banks deep in trouble, bankers said.

"Basically, the offshore banks don't want to take counter- party risk with onshore banks, especially when demand for rupiah is actually zero and everybody is rushing for dollars," a foreign banker in Singapore told AFP.

Vincent Low, fixed income strategist with Merrill Lynch, cautioned about an oversupply of rupiah in the market which could further upset exchange rates.

"If you look at (central) Bank Indonesia balance sheet till November, you will find the central bank has been increasingly printing money and its net money market operations has been expansionary on balance," Low said.

"This is only till November, I would guess that by January the situation will have worsened. So, it's a case of the demand and supply curve for the rupiah not intersecting, and that is causing substantial pressure on the exchange rate," he explained.

The rupiah faltered Friday to 13,500 against the U.S. dollar from Thursday's close of 12,000 after crashing to an all-time low of 16,500.

Bankers said the offshore banks and local banks were also setting separate interest rates.

"What we are seeing is slowly a breakdown in the entire credit system in Indonesia," said Robert Zielinski, a senior banking analyst with Jardine Fleming International Securities Ltd.

He said Indonesian companies, even though they received orders from overseas because of the low rupiah value and cost competitiveness, were being denied trade financing because of waning confidence in the Indonesian financial system.

Zielinski feared foreign banks heavily exposed to Indonesia would pack up and leave that country to "cut losses" because of growing perception that it would take a long time to recover their debts and nothing concrete was being done by the government to tackle the debt crisis.

"The banking system in Indonesia is no longer functioning as a normal banking system should be -- as an intermediary between surplus and deficit units in the economy," said Sani Hamid, emerging markets analyst with U.S. research house Standard and Poor's MMS in Singapore.

"We don't have a free flow of currency trades, no free flow of genuine trades because offshore banks are not issuing letters of credit for Indonesian corporates," Sani said.

He added that offshore banks were segregating from Indonesian banks which they suspected were under serious trouble and would not be able to execute settlements on foreign exchange trades.

Low of Merrill Lynch said a possible resolution to the Indonesian crisis was the setting up of a centralized process to reschedule and write down the mountain of debt owned by corporates.

"But even then it is going to be an intricate process because unlike South Korea where the private sector debt is centralized, in Indonesia it is diffused among 1,000 to 1,500 companies," he said.

Indonesia's offshore corporate debt of US$65 billion is one of the key factors behind the rupiah's persistent plunge.