Temporary freeze of forward deals urged

Temporary freeze of forward deals urged

JAKARTA (JP): The Econit Advisory Group is urging the
government to gradually ease the tight monetary policy and to
temporarily freeze foreign exchange forward transactions as the
liquidity crisis is overkilling the economy.

The economic research institute said over the weekend that the
government should cooperate with the Singapore monetary
authorities in closely monitoring capital outflows through
foreign banks here.

"Bank Indonesia and the tax directorate general should audit
the profits gained by banks and big companies from foreign
exchange transactions," Econit's Managing Director Rizal Ramli
said over the weekend.

"These measures are needed to allow the monetary authorities
to ease the credit crunch without setting off another wave of
speculative attacks on the rupiah," Ramli added.

According to him, the 15 largest business conglomerates in the
country should also be coerced to refrain from foreign exchange
transactions until the currency crisis dies down.

"The latest developments in the foreign exchange market
clearly show that the tighter money policy is not effective for
stabilizing the rupiah rate," he pointed out.

"The current measures could have worked back in the 1970s when
the government's role was very dominant. But our economic
structure has significantly changed now, whereby it is the
private sector that plays the leading role in the economy," Ramli
noted.

The government's decision to hike the interest rate and drain
the rupiah liquidity was an "over kill", as it worsened the
currency problems and might cause further damages to the economy,
he said.

"We believe that Finance Minister Mar'ie Muhammad and the
central bank's governor, Soedradjad Djiwandono, are both men of
reason, integrity and intelligence. But the problem we are facing
now needs a new approach," he said.

Calling the current measure a "pride-driven policy" rather
than a "rationale-driven" one, Rizal urged the monetary
authorities to direct its policy to the improvement of national
welfare and not simply to the strengthening of the financial
position.

The rupiah has been under attack in the past two months,
dropping by nearly 20 percent against the U.S. dollar after the
government floated it on Aug. 19.

The rupiah recovered briefly after the central bank squeezed
liquidity by raising the central bank's certificate rates to as
high as 30 percent for a one-month paper, stopping to discount
money market securities and force state companies to convert
their deposits to the central bank's papers.

However, the currency continued to fluctuate, dropping to
almost the same nadir rate prevailing before the central bank
imposed the credit crunch.

On Friday, the rupiah recovered to Rp 2,890 against the U.S.
greenback after touching a new record low of Rp 3,070.

Rizal said the government ought to act now in order to prevent
further damages to the economic fundamentals.

"The liquidity could be eased by gradually lowering the
central bank's certificates (SBI) and by opening the SBI
repurchasing and rediscounting of money market securities," he
said.

But this eased liquidity should be coupled with a temporary
freezing of foreign exchange transactions to prevent speculation,
he added.

He said the government must audit the profits raked in by
banks and companies from foreign exchange deals and monitor
foreign exchange flows overseas through foreign banks operating
here.

The government also needs to urge the country's top 15
conglomerates to refrain from currency speculation, as many of
the speculators were domestic players, he said.

"I could name at least four local big players in the exchange
market," he said, but he declined to give the names.

Rizal divided the current crisis into two phases, which he
named the Patpong Effect and the Monas Effect.

The Patpong Effect, named after the famous nightspot
entertainment area in Bangkok (Thailand), was the domino effect
from the financial crisis in Thailand in early July.

Rizal said the attacks on the Thai baht in May and June, which
exploded to the baht's devaluation in early July, affected the
Indonesian rupiah as well as the currencies of other countries in
the region in July.

The problem was somewhat contained and the rupiah was
stabilized when the government acted promptly to widen the spread
intervention, he said.

But the currency further weakened when local speculators
entered dollar-buying frenzies, he added.

Problems worsened again when the government decided to drain
liquidity.

He called the latter situation the Monas effect, named after
the national monument in Jakarta, which was built at a time when
the country was facing a dire financial condition.

"The monetary authorities seemed to be overly confident
because our fundamentals are strong, but in an abnormal situation
like this, psychological factors play a stronger role than
fundamentals," he said.

If this dire economic condition drags on over the next two
weeks, many banks and businesses would start collapsing because
of cash flow crises and economic recession, he warned.

Many companies would not be able to get foreign loans, and
many would call defaults because they could not afford the high
interest rate, he said. (das)