Rupiah tips 10-year low before BI intervenes

Aditya Suharmoko ,  The Jakarta Post ,  Jakarta   |  Wed, 11/19/2008 7:13 AM  |  Headlines

The rupiah bounced back from its weakest level in 10 years on Tuesday as demand for the corporate sector to pay off any year-end overseas obligations begins to build.

The local currency fell to 12,225 per U.S. dollar, its weakest level since September 1998, before regaining some ground to 11,850 at 5:24 p.m. in Jakarta on speculation the central bank had intervened to halt its decline, Bloomberg reported.

Bank Indonesia (BI) governor Boediono said the central bank would maintain the rupiah at a “realistic level”.

“With the current level, we expect people to start releasing their dollars,” Boediono said, without providing details.

Boediono attributed the fall primarily to a high demand for dollars from the corporate sector, including state companies, in mid-November.

Banks have asked Indonesian importers to provide more advanced payments in dollars for the issuance of a letter of credit (L/C) as banks tighten up their financing in the face of the liquidity shortage.

An L/C is a document, usually issued by banks for use in trade financing, that promises payment to a beneficiary against complying documents.

“There are several factors contributing to the decline in the rupiah. In November, there is a high demand for dollars from companies, including those organizing the Islamic haj,” Bank Danamon chief economist Anton Gunawan said.

“Meanwhile, importers are being asked to provide more funds for L/Cs as banks are more careful in issuing them. And the central bank’s recent regulation, to come into effect on Dec. 1, makes speculators hoard dollars,” he said.

The BI regulation requires Indonesian citizens or firms to provide a tax file number and evidence of justifying transactions when purchasing more than $100,000 in foreign currencies via spot, forward or derivative transactions.

Foreigners can purchase foreign currencies above the amount only through spot transactions.

Anton said he expected the rupiah to strengthen against the dollar as the regulation took effect.

“There is always a possibility the rupiah may touch Rp 15,000 per dollar, but will it stay at that level for a long time? I doubt it,” Anton said, adding Indonesia’s economy remained fundamentally strong.

Indonesia’s foreign exchange reserves, which stood at $50.58 billion on Oct. 31, are deemed sufficient for the central bank to intervene in the market.

“Foreign exchange reserves are related to imports. And our imports are likely to slow (in the coming months), meaning that we will have enough reserves,” Anton said.

Of greater concern to Indonesia is the impact of the drop in the rupiah on the real sector, as the country will start to feel the effects of imported inflation, which is a major threat to the economy.

“Foreign and local investors may shift their money to other countries if the rupiah keeps devaluating. BI and the government need to calm the market,” Anton said.

Businesses have demanded the government provide a full guarantee of bank deposits to avoid a bank run to move deposits to overseas banks that have offered the guarantee. Demand is intensifying with the rupiah’s ongoing fluctuations against the dollar.

Finance Minister Sri Mulyani Indrawati and Boediono have repeatedly refused to comment on the issue.

Copyright © 2008 The Jakarta Post - PT Bina Media Tenggara. All Rights Reserved.