Currency peg disadvantageous for RI: Analysts<\/p>\n
JAKARTA (JP): The establishment of a currency board system
\n(CBS), which would peg the rupiah to a foreign currency, would be
\ndisadvantageous for Indonesia, analysts have said.<\/p>\n
Economic analysts claimed yesterday that setting up a CBS
\nwould not directly solve the alarming problems of food shortages,
\nunemployment, troubled banks, corporate foreign debts and
\npolitical uncertainty.<\/p>\n
They stressed that the country would do better by sticking to
\nits reform commitments in dealing with the current economic
\ncrisis.<\/p>\n
They also foresaw many long-term dangers if such a system were
\nenacted.<\/p>\n
In the short term, the CBS could make domestic interest rates
\nincrease, threatening ailing domestic banks and cash-strapped
\nlocal businesses, the analysts, most of whom requested anonymity,
\nsaid.<\/p>\n
The rupiah rallied yesterday, boosting other Southeast Asian
\ncurrencies on reports that it could be pegged to the U.S. dollar.<\/p>\n
The rupiah closed at 7,400 against the U.S. dollar, up sharply
\nfrom its close of 9,600 Monday when President Soeharto indicated
\nhe was considering fixing the rupiah's rate to \"kill\"
\nspeculators.<\/p>\n
Supporters for the CBS urged the government to peg the rupiah
\nto the U.S. dollar at the 5,000 level, equivalent to the target
\nset in the government 1998\/1999 draft budget.<\/p>\n
\"To prevent a rush for dollars when the CBS is installed,
\ninterest rates could be boosted,\" said an analyst at a foreign
\nexchange bank in Jakarta.<\/p>\n
Analysts pointed out that in the long term, a CBS could
\npotentially erode the country's trade balance and current
\naccount.<\/p>\n
\"The peg system may cause a deterioration in Indonesian export
\ncompetitiveness,\" said Raden Pardede, an economist with state-
\nowned PT Danareksa Securities.<\/p>\n
The CBS is probably being considered because some analysts
\nbelieve it can contain inflation.<\/p>\n
In tandem with a rigorous US$43 billion International Monetary
\nFund-sponsored bailout package, the government has projected zero
\neconomic growth this year with higher unemployment and a 20
\npercent inflation rate -- ingredients for potential social
\nunrest.<\/p>\n
Despite government assurances that it is committed to the
\nwide-ranging reforms connected to the IMF package -- including
\nslashing monopolies and allowing foreigners to enter into almost
\nall sectors of the economy -- the rupiah has remained sharply
\nundervalued.<\/p>\n
The currency has lost 75 percent of its value from its level
\nof Rp 2,450 against the dollar last July.<\/p>\n
Early this month, U.S. economist Steve Hanke, a persistent
\nadvocate of the CBS, spent an hour discussing the system's merits
\nwith President Soeharto and his key economic adviser, Widjojo
\nNitisastro.<\/p>\n
The President said Monday that he would find ways to fight
\ncurrency speculators, prompting opinions that he was talking
\nabout the CBS.<\/p>\n
\"Soeharto seems to be entertaining this idea because a
\ncurrency board would answer the solvency problems of many debt-
\nridden corporations,\" said an analyst.<\/p>\n
He added that the idea seemed to be a short cut for the aging
\nleader to bring back financial stability.<\/p>\n
Analysts believe the rupiah crisis is partly due to the
\ncountry's mounting corporate foreign debt problems. The
\ngovernment recently announced that overseas debts for local
\nprivate companies amounted to $23 billion.<\/p>\n
The analysts said the CBS might not be a solution to the debt
\ncrisis. \"Even at the Rp 5,000 level, not all companies could
\nservice their foreign debts,\" said an analyst with a joint-
\nventure securities firm.<\/p>\n
He added that the setting up of a CBS might prompt debt-ridden
\ncompanies to compete for the available foreign reserves, a
\nsituation that could induce ordinary people to follow suit.<\/p>\n
He explained that Indonesia's money supply totaled some Rp 75
\ntrillion. To bring the exchange rate to the Rp 5,000 level, Bank
\nIndonesia would have to put up $16 billion to cover the system.<\/p>\n
The central bank has stated that its foreign exchange reserves
\ntotal about $18 billion.<\/p>\n
The analyst said the remaining $2 billion would be too small
\nto service the country's foreign obligations.<\/p>\n
\"The only way to prevent such a stampede is to extend the
\nrepayment freezing policy,\" he pointed out.<\/p>\n
\"The feasibility of the CBS will depend on whether the
\ngovernment could provide political certainty, that investing in
\nIndonesia is safe,\" he said. \"Otherwise people will continue to
\nchange their local assets into dollars,\" he added.<\/p>\n
He said the CBS had several advantages, including providing
\ncertainty in the rupiah's conversion rate, creating confidence in
\nthe country's monetary system and instilling macroeconomic
\ndiscipline that limits budget deficits and inflation since the
\ngovernment would limit rupiah circulation to the amount of U.S.
\ndollars it held.<\/p>\n
Nevertheless, some analysts opined that giving up the exchange
\nrate system would be too much of a gamble in the longer term.<\/p>\n
\"We are in favor of doing our homework by staying on the
\ncourse of reforms by resolving debt and banking problems,\" said
\nDanareksa's Raden.<\/p>\n
Several Indonesian businessmen expressed support for an
\nadoption of the CBS. They include Boyke Gozali, president of Bank
\nTiara; Soebronto Laras, president of Indomobil Corp.; and Rossano
\nBarrack, vice president of the Bimantara Group.<\/p>\n
But Benny Santoso, finance director of the Salim Group,
\nIndonesia's largest conglomerate, said it would be wise to first
\nstudy the system's advantages and disadvantages before making a
\ndecision.<\/p>\n
A senior economist at Gadjah Mada University, Sudijono
\nReksoprajitno, proposed an alternative, which he called the
\nsteady growth exchange rate system. This would allow for a
\nlimited daily appreciation of the exchange rate by 0.06 percent,
\nfor instance. (08\/23\/aly)<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/currency-peg-disadvantageous-for-ri-analysts-1447893297",
"image": ""
},
"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
}