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Dollars hoarded as confidence erodes in Indonesia

Publication Date : 14-06-2012

 

Eroding trust between banks, and exporters’ obvious penchant for raking in currency windfalls by holding on to their dollars are being blamed for exacerbating the recent slump in the currency market.

The impact of the recent jitters over the deepening crisis in Europe, which triggered foreign investors to dump rupiah-denominated assets, could have been reduced had these problems been better managed, according to Bank Indonesia (BI) Governor Darmin Nasution late on Tuesday.

“The recent weakening in the rupiah was triggered more by the unavailability of dollars in the market because exporters were waiting for the rupiah to slump further in order to cash in more gains,” said Darmin.

“The [dollar] supply is sufficient, but somehow it could not be channeled properly into the market.”

The rupiah touched 9,643 rupiah to the dollar early on May 31, its weakest level since October 2009, before trading at 9,437 rupiah in the evening.

The rupiah plunged 2.7 per cent in May as international fund holders dumped 7.7 trillion rupiah (US$815 million) in stocks and 4.3 trillion rupiah ($454 million) in government bonds.

“There’s a market mechanism that’s failing to work. The dollar was there, but somehow it was not available in the market,” said BI’s deputy governor Halim Alamsyah.

Another factor holding back the supply is the eroding confidence among banks in providing short-term dollar loans to each other, particularly amid deepening uncertainties in the global financial market, according to Halim.

“We asked several banks that we knew had huge dollar reserves about their refusal to enter them into the market. They said they were worried about the ability of fellow banks to repay their dollar debts,” said Halim.

“They also didn’t want to store their dollars offshore because they were worried about the current global conditions,” he added.

As banks stash their dollars, they risk violating a BI regulation on the maximum amount of foreign exchange (forex), which should not exceed 20 per cent of their capital.

“If banks have excessive forex reserves, we fear they may use them for dubious activities, such as currency speculation,” said Darmin.

In order to absorb the excessive reserves and to help smooth the dollar supply in the market, including for banks, BI issued on Wednesday an instrument known as a foreign exchange term deposit.

“Once the dollars are deposited, we will release them into the market. Basically, we will be an intermediary,” Halim said, adding that BI would return the function of intermediary to the market once the situation was considered conducive.

Bank Mandiri economist Leo Putera Rinaldy said it was usual to see a lack of dollars during an “abnormal time”. “The market tends to display risk aversion behavior during global uncertainties. Therefore, we’ve seen banks that are reluctant to play their intermediary role vis-a-vis other banks, and exporters who prefer to hold on to their dollars. Dollars have always been regarded as a safe instrument to keep during crises.”

Leo expects BI to be able to fully utilise its term-deposit instrument to lure offshore dollar assets into Indonesia.

Wednesday’s first auction of the instrument was oversubscribed at $1.61 billion from the offering of $700 million, according to BI spokesman Difi Johansyah. Deposits with a maturity period of seven days carry 0.16709 per cent interest, while those with a 14-day maturity period have 0.18000 per cent, according to Difi.

However, the measure has failed to stem the fall in the rupiah as the currency weakened 0.2 per cent to 9,420 per dollar as of 5 p.m., according to prices from local banks compiled by Bloomberg.

"The term deposits didn’t meet market expectations,” said Taufan Tito, a foreign-exchange dealer at Bank Rakyat Indonesia, as quoted by Bloomberg. “Rates offered by BI were lower than expected as it didn’t want to overstep its authority by exceeding rates in the US,” he added.

 

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