*
Domestic transactions must be in rupiah from July
* About
10 pct of domestic transactions now in dollars
* Firms
say may settle in rupiah but still price in dollar
* Some
warn of inflation pressure to counter exchange risk
JAKARTA,
May 20 (Reuters) - As Indonesia prepares
to ban domestic use of the dollar to build faith in its own currency, it might
succeed in taking the greenback out of local hands, but much of the benefit of
the reform will be lost as local heads still calculate in dollars.
Many
businesses say they will still effectively be hostage to gyrations in
Indonesia's volatile rupiah after the new rule takes effect in July, and
inflationary pressures could emerge as companies try to build in buffers to
counter the loss of dollar certainty.
Distrust
of the rupiah, emerging Asia's worst-performing currency this year, runs deep
in an economy where high interest rates and a history of hyperinflation have
pushed companies to borrow in dollars and also bill in dollars for many local
goods and services.
About 20
percent of office towers in Jakarta charge their tenants rent in dollars, for
example, and Bank Indonesia estimates about 10 percent of domestic transactions
are conducted in dollars, $6 billion every month.
Mandating
use of the rupiah for contracts drawn from July 1 will alleviate some pressure
on the currency by reducing a small amount of dollar demand, but many local
businesses say they will still negotiate and price in dollars, then settle in
the local currency.
State
power utility PT Perusahaan Listrik Negara (PLN) bills its customers in rupiah,
but it needs about $600 million in foreign currency every month to pay local
coal miners and power producers and to service its loans.
Under the
new regulation, PLN's payments to local producers can no longer be in dollars,
and while that would in theory suit the company, in practice, the rupiah price
it pays will still be determined by dollar exchange rates.
"We
are still negotiating, but even when we agree to set the contract in rupiah, we
have to discuss the exchange rate that will be used," says Tjutju Kurnia,
head of treasury at PLN.
Its
vendors have liabilities in dollars, she said, so they have to build in foreign
exchange risk.
Some
vendors, such as state-controlled coal miner Bukit Asam , with whom PLN has two
power purchase contracts, have already adopted settlement in rupiah, but they
still quote prices in dollars.
Bukit
Asam's corporate secretary said the firm had a calculation system in place and
every dollar cost in their investment or production activities was converted
into rupiah.
MORE RISKS
Heavy
equipment distributor and mining contractor United Tractors sells all its
products and services in dollars "simply to match cash in and cash
out", said corporate secretary Sara Loebis.
Loebis
said United would comply with the new rules but it might mean more risks for
the firm.
In the
textiles industry, Indonesia's second largest manufactured goods exporter,
every transaction in the supply chain except labour costs is in dollars.
Electricity
bills are settled in rupiah but they fluctuate every month because the charges
are dollar-based. The fibre and the spinning industries also pay for raw
materials in dollars and sell products locally in dollars.
"If
Bank Indonesia requires this industry to convert their dollars to rupiah, I'm
afraid their prices will not be competitive with products that are directly
imported," says Ade Sudrajat of Indonesian Textile Association.
Leo Putra
Rinaldy, an economist at Mandiri Sekuritas, warns that an unintended
consequence of the new rules could be inflation, as companies err on the side
of inflated rupiah values to hedge against currency swings.
"There
would be companies that set the rupiah exchange rate based solely on their
expectations, and mark them up," said Rinaldy. "If you are a single
producer or single supplier, you have the power to do that, but if it is a
competitive market, buyers would look for better pricing."
Such
incidental costs weigh against the benefits of the new regulation, which
doesn't address the main source of rupiah volatility: the economy's dependence
on foreign capital and its vulnerability to capital flight in times of trouble
or when U.S. interest rates start rising, as expected later this year.
At last
count, foreign investors held 38.4 percent of the outstanding value of
Indonesian government bonds.
"At
the margin, the policy can help a little bit. Our longer term view is that
rupiah can stabilise, but it won't really be driven by that kind of
regulation," said Victor Rodriguez, head of Asia Pacific fixed income at
Aberdeen Asset Management Asia Ltd.
By
Fransiska Nangoy
Editing
by Vidya
Ranganathan and Will Waterman
Business & Investment Opportunities
Saigon Business Corporation Pte Ltd (SBC) is incorporated
in Singapore since 1994.
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