Rupiah strengthens as BI raises interest rates

Rupiah strengthens as BI raises interest rates

JAKARTA (JP): The rupiah rose sharply yesterday to cross 2,900
level against the U.S. dollar after Bank Indonesia (the central
bank) raised one-week to three-month treasury rates, dealers
said.

Spot rupiah was traded at over 3,000 level in morning trading.
Soon after Bank Indonesia raised treasury rates, the rupiah
immediately soared to 2,845 and closed at 2,850/2,870.

"Overseas players are suddenly selling dollar to make profit,
knowing the one-week to three-month rupiah is getting more
expensive," one local foreign exchange bank dealer said.

The central bank raised one-week bilateral Bank Indonesia
Certificates (SBIs) to 20 percent from 10.5 percent, two-weeks to
22 percent from 11 percent, one-month to 30 percent from 11.625
and three-months to 28 percent from 11.5 percent.

But it kept overnight SBIs at 15.0 percent, two-to-six day at
16.0 percent, six-month and one-year at 12.125 percent and 12.75
percent respectively.

"We expect the new rate increase to cause a more substantial
contraction in the money supply so as to curb an abnormal
depreciation of the rupiah," Bank Indonesia's Governor Soedradjad
Djiwandono said yesterday.

Target

But he said the monetary authorities did not set a specific
target for the amount of rupiah to be soaked up by the higher
treasury rate.

"It depends on the market," added Soedradjad after attending a
meeting of the Monetary Board at the finance ministry.

Other board members -- Finance Minister Mar'ie Muhammad,
Coordinating Minister for Economy and Finance Saleh Afiff and
Minister/State Secretary Moerdiono -- also attended the meeting.

Afiff confirmed yesterday that state companies and banks had
been asked to place part of their surplus funds in Bank
Indonesia's certificates in another effort to soak up liquidity
in the market.

"This reminds me of a Sumarlin move, which shocked everyone in
the banking industry," said Schroder Indonesia's senior analyst
John Rachmat, referring to the tight money policy introduced by
then Finance Minister J.B. Sumarlin in 1991.

"If the central bank continues to pursue this tight policy, it
could easily burn everyone in the market, especially small
players," he said.

He contended that several small banks now faced serious
liquidity problems.

And those banks could easily become default if the central
bank remained absent from the SPBU market, he warned.

Overnight rupiah on the interbank market reached 160 percent
before easing to 40 percent at yesterday's close.

This could trigger bigger problems like those in Thailand,
where several financial institutions collapsed, he warned.

"If that happened in Indonesia, foreign investors would
certainly pull out their investment from this country," he
warned.

He suggested the central bank reenter the SPBU market, but
with higher discount rates.

"It's better to reenter the market with higher rates than
never," Rachmat said.

While rupiah was strengthening, share prices on the Jakarta
Stock Exchange tumbled again yesterday, with the composite index
dropping 1.5 percent to close 9.196 points lower at 590.530.

Stock brokers said state-owned PT Danareksa Securities and PT
Bahana Securities conducted massive buying to stop the index from
falling again.

But the two firms were exhausted because the market was still
dominated by selling mood, they said.

Rachmat said the price of most stocks were lower than their
book value given the current market condition.

He said most people could not foresee the direction of the
market in the next few months given uncertainties in the currency
market. (aly/rid)

Currency -- Page 11