Sat, 15 May 2004

Rupiah down to fresh 14-month low as central bank intervenes

Dadan Wijaksana, Jakarta

As the central bank moved to tighten the rules on foreign exchange transactions to minimize speculation on the rupiah, the local unit slumped on Friday to a fresh 14-month low on the greenback's continued strength.

The local currency closed at 9,040 to the dollar, down from 9,010 from the previous closing, with dealers attributing the decline to the greenback's continued strong showing over other benchmark currencies, notably the yen.

"The yen's weak footing is dragging down other regional currencies, including the rupiah," said a dealer with a state- owned bank.

Friday's closing was the lowest since March last year.

The rupiah's recent shaky showing has been exacerbated by divestment in the Jakarta stock market as expectations of an interest rate rise in the U.S. forces investors to shift investments to dollar-dominated assets.

On Friday, the stock index ended at 722.71 points, 2.2 percent lower than the day before.

Bank Indonesia however, dismissed concerns the rupiah's slump would be long-term, saying the unit could bounce back to a level of 8,700 within three months, given the country's relatively sound economic fundamentals.

Bank deputy governor Aslim Tadjudin said the slide was mostly because of external factors. However, Aslim said the central bank was doing its utmost to limit speculation on the rupiah as speculators were also to blame for its decline.

Among other measures, the central bank was reviewing a ruling setting maximum foreign exchange dealings without underlying transactions at 20 percent of trading banks' equity capital, he said.

The rate is set out in the central bank ruling on a bank's net open position (NOP), which regulates to what extent a bank can go short or long on foreign currencies against the rupiah.

"The new rate will probably no longer be equal for all banks, depending, in part, on how actively a bank trades in foreign exchange," he said.

Aslim said the new ruling would not only apply to foreign banks as had been expected. The central bank had earlier issued four foreign banks with warning letters over their alleged speculative transactions.

Meanwhile, on the stock market, negative sentiment also hurt the local index in line with falls in regional markets.

A weak rupiah and a stronger dollar are likely to hurt big companies here, many of which remain highly indebted to foreign creditors with most of the debts in dollars.

The debts are a product of the late 1990s financial crisis, which saw the rupiah depreciating by around four times its value.

Friday's trading saw volumes at 1.5 billion shares valued at Rp 889 billion, against 1.48 billion shares at Rp 851 billion on Thursday.