BI limits forex purchases to stem rupiah slide

As the rupiah slumps, the central bank will limit the purchase of foreign currencies above US$100,000 only to those who can provide underlying transactions.

Through a new regulation to be effective starting Thursday, Bank Indonesia expects the policy to balance demand and supply in the forex market, reduce extreme pressure to the rupiah and minimize forex purchase for speculative means, governor Boediono said in a statement Wednesday.

"The regulation is based on the free foreign exchange system that Indonesia adopts now, in which every citizen is free to own and use foreign currencies, as stipulated on the Law No. 24/1999 on foreign exchange flow and exchange rate system," Boediono
said.

"It is not a foreign exchange control policy or capital control that limits capital flow between countries."

Individual customers and registered Indonesian and foreign companies are still allowed to freely purchase foreign currencies through spot, forward, or derivative transactions, BI said.

However, Indonesia citizens or firms wanting to purchase more than $100,000 in foreign currencies need to provide underlying transactions, such as invoice used to import goods or paying debts.

Meanwhile, foreign parties can purchase that amount of money through spot transactions only.

The regulation is expected to limit speculative purchases of currencies. With the regulation in place, BI expects that banks to be able to detect which customers purchase dollar for
speculative means.

Analyst Farial Anwar has said that the tumbling of rupiah was caused by the free foreign exchange system implemented by Indonesia.

With capital control, Farial said, the government could easier manage the flow of investment-oriented money, or hot money, into and out of Indonesia.

"Hot money is hard to monitor and control, and the money enters only the financial sector, not the real sector. It makes us black and blue, while only 2 million people out of 220 million
population engaging in the financial sector.

"If the rupiah stays at the current level for a long time, it will affect the state financing and make the people suffer," he said.

On Wednesday, the rupiah fell 1.6 percent to 11,485 per dollar as of 4:10 p.m. in Jakarta. The currency reached 11,700 Wednesday, approaching the 11,900 it reached on Oct. 28, thr
lowest since 2001.

"Investors are switching from the capital market to the foreign exchange market to compensate their losses, thus the dollar strengthens. Investors say it's a safe haven," Farial
said.

According to Bloomberg, the rupiah has weakened by 14 percent in the past month, making it the worst performer among Asia's 10 most traded currencies.