Indonesia pledges free capital flows, saves bank

JAKARTA (Reuters) - Indonesia's central bank pledged on Friday to respect the free movement of capital, seeking to plug seeping investor confidence as the embattled rupiah hit a new decade low and authorities swooped in to save a small bank.

Marking a potential new worry for Southeast Asia's biggest economy, the government decided to take over Bank Century Tbk after a deterioration in its assets, the first local lender to be taken over since the Asian crisis in the late 1990s.

The rupiah, which has lost more than a fifth of its value against the dollar this year, fell in early trade on Friday to its weakest since August 1998, pressured by the fear of capital outflows and despite reassurance from policy makers.

"We are committed to our free capital movement law," central bank governor Boediono said, dismissing speculation about any plans to bring in capital controls.

Indonesian officials have scrambled to come up with measures to contain a crisis sparked by fears that Indonesia could become the next casualty of a global flight from risky assets.

The central bank has repeatedly intervened to support the rupiah and last week tightened foreign exchange buying rules.

The country's oil regulator also said on Thursday it would order contractors to use local banks to deposit billions of dollars for energy projects in order to help the currency.

"We will remain in the market and we will use our ammunition," Boediono said, adding that reserves currently stood at a "comfortable" $50.4 billion.

Despite his comments, the rupiah sagged to 12,500/13,000 per dollar in early trade, down from Thursday's lows of 12,400, although recovered to 12,100 in later trade.

BANK PROBLEM SEEN AS ISOLATED

With the global financial turmoil affecting liquidity in Indonesia's bank sector, Boediono said the country's deposit insurance agency (LPS) has moved to take over Bank Century "to ensure the safety and quality of service to its customers."

The central bank had said last week Bank Century, a relatively small bank with total assests of 15 trillion rupiah, was having problems in settling interbank payments due to technical problems.

"There was a deterioration in its assets, which required provisioning and it could lead to a lower CAR (capital adequacy ratio)," Rudjito, a senior official at the deposit insurance agency, said.

Joshua Tanja, head of research at UBS in Jakarta, said the problems at Bank Century appeared to be isolated.

"I think the worst of the liquidity problem in the banking sector is over," he said, adding that the government had acted promptly and had pledged to reopen the bank on Monday.

The financial stocks sub-index was down about 3 percent in afternoon trade, compared with a 1 percent fall in the benchmark Indonesia Composite Index.

The turmoil on the financial markets has brought back uneasy memories of the Asian financial crisis, when the rupiah fell to 17,000 in early 1998, leaving much of corporate Indonesia technically bankrupt, and the economy shrank 13 percent.

Indonesian companies owed creditors abroad about $80 billion, or four times the country's foreign exchange reserves at the start of crisis. Capital went into a panicked flight and Jakarta was forced into agreeing to an IMF rescue package.

Enrico Tanuwidjaja, an economist at OCBC Bank in Singapore, said Indonesia's economic fundamentals were in much better shape than a decade ago and attractive yield differentials should actually be attracting foreign money to the country.

"From our lens, what is currently happening is pretty much sentiment-driven, and coupled with prolonged negatives in the financial markets. Such risk aversion is likely to continue in 2009," he added.

(Additional reporting by Tyagita Silka and Harry Suhartono)

(Writing by Ed Davies)