Speculation rampant, rupiah under attack

Rendi A. Witular, Jakarta

The rupiah remained under attack on Thursday, with some local analysts blaming foreign-based banks for continuing to speculate against the local unit despite a reprimand from the central bank.

However, they said the foreign banks were not solely to blame for the devaluation and said the reaction of Bank Indonesia (BI) had exacerbated the problem.

The rupiah closed at Rp 9,003 against the U.S. dollar, down from Rp 8,960 on Wednesday.

Currency analyst Panji Irawan said aside from being impacted by losses in several regional currencies, the rupiah was under pressure from profit-taking by speculators who managed evade the central bank's supervision.

"The speculators are old players who have significant portions of their investment portfolios in the stock market. They speculate on the stock, cashing in yields into U.S. dollars and transferring them overseas," said Panji.

Panji said that another speculation method was to borrow rupiah from the interbank money market and use the funds to buy dollars, which were then transferred overseas.

He said the speculators were involved with four as-yet-unnamed foreign banks that recently received warning letters from Bank Indonesia. To escape from the central bank's supervision, the banks' overseas parents used other financial institutions in Indonesia to continue speculating.

Central bank Governor Burhanuddin Abdullah said on Wednesday BI had sent warning letters to the four banks for making the rupiah a subject of speculation against the U.S. dollar. He declined to name the banks.

The greenback strengthened amid a strong likelihood the U.S. Federal Reserve would start to gradually increase its interest rate soon.

Currency analyst Ryan Kiryanto of Bank Negara Indonesia said the foreign banks should not be blamed for the devaluing rupiah as they were only trying to get a good return on their investments.

"BI should have prevented the banks from speculating with the rupiah earlier when the currency was at Rp 8,700, in a bid to reduce the room for them to speculate. The banks should not be blamed because they are only here to seek profit," Ryan said.

"The recent statement by Burhanuddin is likely to be detrimental to the market as it could be considered a sign of a lack of confidence or helplessness on the part of the central bank to deal with the problem," he said.

Meanwhile, Aris Anwari, BI's director for state-owned banks and provincial banks, said the central bank had issued a "moral persuasion" to one state-owned bank that apparently took part in the speculation. Aris refused to name the bank.

He said the bank had clarified to BI its dollar buying was aimed at offsetting its losses because it had applied the wrong strategy to its dollar-based investments.

"The buying was not intended for profit taking. The (US) dollars were not sent overseas," Aris said.

In a bid to prevent the rupiah from being speculated against further, BI had planned to tighten its ruling on foreign exchange transactions by revising its net open position (NOP) to foreign- based banks.

The NOP is the extent to which a bank can go against the rupiah. BI has maintained the NOP at a maximum of 20 percent of a bank's equity capital at the end of each trading day.

Aris said there was a possibility the central bank would reduce the maximum NOP to below 20 percent in a bid to limit its exposure to speculation.

Aris said BI had begun deploying officials into bank dealing rooms on Tuesday in a bid to prevent dealers from speculating against the rupiah.

Elsewhere, the Jakarta Composite Index closed by 0.69 percent lower or 5.154 points to 739.137 on volume of 1.48 billion shares traded worth Rp 843.26 billion (US$93 million). Analysts said the decline was in line with weaker regional markets.