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)

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