Singapore banks move on after Indonesian shock

Singapore banks move on after Indonesian shock

SINGAPORE (Dow Jones): As shell-shocked foreign exchange dealers in Singapore recuperate from Bank Indonesia's controversial currency rules which have effectively wiped out the offshore rupiah market, many are bracing for the fallout on the industry.

And once banks in Singapore settle their outstanding rupiah- related transactions with other counter-parties offshore ahead of Thursday's deadline, negotiations on the setting up of a non- deliverable currency forward market to replace spot rupiah trading will likely gain momentum, dealers say.

Bank Indonesia recently denied speculators access to funding for short rupiah positions, in its bid to curb speculative attack on the beleaguered currency. Under the central bank's tighter regulations, announced on Jan. 15, banks outside Indonesia can no longer buy or sell rupiah among themselves.

Offshore banks can only sell rupiah to Indonesian counter- parties - and even then, it must be rupiah that they already own.

The new rules effectively prevent speculators from short- selling the rupiah.

Brokers, already feeling the pinch from electronic broking systems and shrinking volumes in Asian foreign exchange markets, will likely be the biggest casualty from Indonesia's foreign exchange curbs, since they rely on currency flows for their income, industry participants say.

While some rupiah brokers are already forced to divert their energies to other currencies, like the Thai baht, or other currency instruments, such as non-deliverable currency forwards, others could suffer from layoffs.

"Brokers are already facing a tough time at the moment; with the demise of the rupiah market, there'll be some retrenchments," says a European bank dealer.

For one broker at a large foreign firm, his future still hangs in the balance.

"We'll be having a meeting next week, after which we'll have a clearer idea," says the broker. "But I think it will affect us sooner or later."

Foreign exchange dealers in Singapore have less to worry about - at least for now - given the smaller risk of getting laid off. Most banks have already downsized their treasury operations since the 1997-98 financial debacle, leaving them relatively lean.

"We have less currencies to trade now, but most of the banks were foreseeing a slowdown of activities and have already trimmed their operations," says a chief dealer at a European bank. "A lot of dealers trade a wide range of instruments and they can just switch their portfolios."

"We are relooking our foreign exchange operations - whether we need more people or whether they can be redeployed into something else," says the country manager of a European bank. "The baht is already a half market" after the Thai central bank tightened regulations on transactions in the local currency late last year.

A dealer at another European bank says: "The good thing was that even before BI (Bank Indonesia) came out with this ruling, I've been told that I'll be quoting the baht as well. We've more or less been consolidating our regional desk. Out of three currencies - which were the Singapore dollar, the baht and the rupiah - we have two dealers quoting them, so when they took away the rupiah, it didn't affect us at all."

Indeed, with trading volume in the rupiah accounting for a small portion of turnover in Asian foreign exchange trading, many market watchers say Bank Indonesia may just be shooting itself in the foot by chastising offshore currency speculators for the rupiah's misfortune.

The bulk of the selling pressure on the rupiah has come from Indonesian corporates needing to fulfill or hedge their dollar requirements. Rupiah trading volumes in offshore markets have dwindled since the financial crisis, with daily turnover in Singapore estimated around $50 million to $100 million before the regulations were imposed last month.

As they digest the complex regulations which have smothered the offshore rupiah market, banks in Singapore have been discussing the formation of a non-deliverable currency forward, or NDF, market, which doesn't require any delivery of the rupiah. This market would likely be beyond Bank Indonesia's jurisdiction since settlements are made in dollars, dealers say.

"It's like a black market," says a U.S. bank dealer. "It's meant to operate without the blessing of the central bank."

Among Asian currencies, there is already trading in non- deliverable forwards on the South Korean won, the New Taiwan dollar, the Philippine peso, the Indian rupee and the Chinese yuan.

Banks would first need to agree on the technicalities, such as the point of reference for their fixing rates before the market can take off, dealers say.

But there already signs of the market evolving. A handful of the larger banks are offering non-deliverable forward quotes on the rupiah upon their customers' request, without going through brokers.

But there already signs of the market evolving. A handful of the larger banks are offering non-deliverable forward quotes on the rupiah upon their customers' request, without going through brokers.

"A lot of people are checking. Three major banks have been checking around and asking us if we're interested in making prices in rupiah NDF, but the market is still inactive," says the European bank dealer.