Singapore unlikely to allow rupiah in NDF market
JAKARTA (JP): The Monetary Authority of Singapore (MAS) is unlikely to approve the plan by a number of foreign banks in the neighboring island state to start trading rupiah in non- deliverable forwards (NDF), according to a source at Bank Indonesia.
"The MAS won't approve the plan. We've talked to them by phone," the source told The Jakarta Post at the weekend.
The source who preferred anonymity said that without MAS approval, banks in Singapore would be hesitant about participating in the arrangement.
"So, the NDF plan is unlikely to be implemented," the source added.
Reports said earlier that a handful of foreign banks in Singapore planned to start trading rupiah non-deliverable forwards starting Monday.
The plan was made after Bank Indonesia issued a new foreign exchange ruling in the middle of last month which effectively closed offshore speculators' access to funding for short rupiah positions. Consequently, offshore banks can no longer buy or sell rupiah among themselves. But the new ruling does not amount to a capital control. Rather it is aimed at reducing volatility in the ailing rupiah, and so far it seems to be working.
Speculation against the rupiah has been one of the most lucrative businesses of the offshore banks.
But Bank Indonesia cannot ban the NDF currency market because settlement is made in U.S. dollars, so that it is beyond the central bank's jurisdiction.
Theoretically, the NDF market in Singapore could create new volatility in the spot rupiah market amid Indonesia's current political instability.
The NDF market involves trading in a currency based on different forward rates calculated by interest rate differentials. This could allow arbitrageurs to capitalize on the discrepancies in NDF and onshore rates.
Banks would post their quotes on the Association of Banks in Singapore's fixing page on Bridge Telerate page 50157, dealers said, adding that the tenor of the contracts would extend out to six months.
Bankers in Singapore expected four to eight banks would eventually participate in the new market and the initial size of transactions would be up to US$2 million.
Analysts in Singapore said last week that the new market was important not only for Indonesia but also because it might set a precedent for how bankers respond to regulatory changes in other Southeast Asian countries.
There are already non-deliverable forward markets for a number of other Asian currencies including the South Korean won, New Taiwan dollar, Philippine peso, Indian rupee, and Chinese yuan.
The Bank Indonesia source said that the Indonesian central bank would be highly upset if the MAS were to give its approval to the NDF plan.
"It would be like directly challenging Bank Indonesia," the source said.
Indeed, the new Bank Indonesia forex ruling has so far been seen as the most commendable policy adopted by the central bank in a long time and has gone some way to improving the reputation of the bank whose public image has been shaken by the alleged mishandling of the multibillion dollar bank liquidity support facility, and by the court trial of Governor Sjahril Sabirin over alleged involvement in the high profile Bank Bali scandal.
The new forex ruling has managed to keep the rupiah hovering at around Rp 9,500 per U.S. dollar despite the increasing conflict between President Abdurrahman Wahid and the House of Representatives.
Less volatility in the rupiah is important for the country's business sector, particularly exporters, in making business calculations. The new forex ruling, however, will not necessarily strengthen the ailing local unit.
Previously, the rupiah had been highly volatile due to a combination of economic and political problems at home.
Top Bank Indonesia officials have generally declined to comment on the NDF plan.
But Dow Jones last week reported that some offshore bankers feared Bank Indonesia might be forced to adopt capital controls if the rupiah was seriously affected by the NDF market, although such a measures might be blocked by the International Monetary Fund (IMF), which is providing a multibillion dollar loan to the country. (rei)