Speculation rampant, rupiah under attack

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.