Singapore unlikely to allow rupiah in NDF market

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)