US Dollar Notes Still Highly Coveted in Indonesia

US Dollar Notes Still Highly Coveted in Indonesia

By Dion Bisara on 10:01 am October 28, 2013.
The US Federal Reserve reiterated its commitment to meet demand for US dollar notes in Indonesia, currency that many Indonesians still highly regard as an instrumental of storing value. “Our role in the Federal Reserve is simply to meet the demand. It does not matter if it comes from domestic or abroad,” Michael J. Lambert, the Fed’s associate director for reserve bank operations and payment systems division, told the Jakarta Globe in an interview last week.Lambert was in Indonesia last week to promote new $100 notes that were introduced worldwide for the first time on Oct. 8. The new notes bear two additional security features — a blue three-dimensional security ribbon with images of bells and the number 100 that run vertically and appear to move when tilted. Beside the image of Benjamin Franklin, a bell in an inkwell changes color — from copper to green — when the note is tilted in the light.

“What is important to us is that people will continue to use it and know what we’ve done. We don’t want confusion in the market,” Lambert said.

There’s no need to exchange the older bills for new ones as they remain legal tender, he said.

“That’s important for a lot of people who hold US dollars abroad, in particular for store of value reason,” Lambert said.

About $900 billion of hundred-dollar bills are in circulation, and about a half to two-thirds of them are traded overseas.

There is no exact data on the amount of hundred-dollar bills in Indonesia.

Bank Indonesia holds $93 billion in foreign reserves, but a small amount is in physical notes, said Difi A. Johansyah, a spokesman at the central bank, because it stopped supplying local banks with the dollar notes several years ago for logistical and administrative reasons.

Local banks and money changers get their hands on dollar notes through foreign bank branches that operate in the country.

Lambert said that he expected the use of dollar note demand to continue to rise in the future, despite growing use of electronic payments through debit cards, credit cards, or online transactions.

“People still like to hold on to cash, for security reasons, or just in case that electricity was down,” he said.

Lambert noted that demand for dollar notes had accelerated after 2008 financial crisis, with average growth at 7 percent annually.

He said that hundred-dollar bills usually were in demand in times of economic and political uncertainty in countries around the world.

“There are close ties into those concerns. People [in those] countries [with] history of political instability hold onto the value of physical currency,” Lambert said.

Indonesia has its own experience with surging dollar notes demand in 1997-98 when the financial crisis hit the region, triggering drastic change in the political regime.

The hundred-dollar notes are also highly regarded in Indonesia because it’s the only note that is traded at market price in most currency dealers across the country. For example, with the central bank’s quote on the rupiah at 11,142 to the dollar on Friday, typically the rate sold for rupiah would be almost the same.

Smaller-denominated dollar notes like 50s and 20s and 10s, though, would trade at a discount of about Rp 50 to Rp 100 (4 cents to 9 cents) for every dollar.

Conditions also matter. A crisp hundred-dollar note would fetch close to the rate for the day. Those that have been stapled or folded would fetch a lower price.

“A scratch will cost you even more,” a trader at a money changer in Jakarta said over the weekend. The person, who wished not to be named, said that traders often deal with local customers who demand crisp notes. “You see, we also have to operate in a very tight margin here,” he said.

Bank Indonesia’s Difi said that unlike in Singapore or Hong Kong were the US dollar is regarded as legal tender, most Indonesians still use the notes to store value, like they would with gold bars or jewelry.

“So, it’s only natural that they want it in a very good condition,” he said.

Lambert was surprised to find such a situation in Indonesia. “This is one of the dilemmas for us, because from the Federal Reserve’s perspectives, this has the same value,” he said, adding that what really matter is that the notes show all the security features as proof of being genuine.

Still, Lambert said local markets tended to have certain ways to value the notes.

“That’s a decision that is made in the local level that we obviously cannot control,” he said, adding that he would raise the issue when talking with banks that distribute dollars in this region.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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