IMF unlikely to say yes to fixed rate plan for RI<\/p>\n
SINGAPORE (AFP): The IMF is very unlikely to accept a proposal
\nby a popular Indonesian opposition party for a fixed exchange
\nrate system, analysts said Friday.<\/p>\n
The Indonesian Democratic Party of Struggle (PDI Perjuangan),
\nled by popular Megawati Soekarnoputri, was reported as saying it
\nwanted to launch the fixed exchange rate system to protect the
\nindustrial sector if it wins the June 7 polls.<\/p>\n
\"The market doesn't think this will become a reality so long
\nas the IMF is in Indonesia. Anyway, it could be some time before
\nthe IMF leaves Indonesia,\" said Sani Hamid, emerging market
\nanalyst with Standard and Poor's MMS.<\/p>\n
Indonesia's recovery hinged heavily on financial funding by
\nthe International Monetary Fund (IMF), which led a global bailout
\nof the huge economy following the collapse of the rupiah in 1997,
\nSani said.<\/p>\n
The rupiah was traded under a managed float system before the
\ncurrency sank during foreign exchange turmoil in the region which
\nerupted in mid-1997. Prior to the managed float system, the
\nrupiah was traded at a fixed rate.<\/p>\n
The PDI Perjuangan, in comments reported Thursday, said it
\nwould first seek approval from the IMF over its proposed fixed
\nexchange rate system.<\/p>\n
Christy Tan, analyst with financial consultancy
\nIDEAglobal.com, said the proposal had been ruled out by the
\nmarket as a viable alternative.<\/p>\n
The IMF had previously shot down a Hong Kong-like Currency
\nBoard system proposed by President Soeharto before he fell from
\npower, she said.<\/p>\n
There was little impact on the rupiah Friday from the PDI
\nPerjuangan proposal. It was a shade lower at 8,110 against the
\ndollar from Thursday's close of 8,100.<\/p>\n
Kate O'Donoghue, analyst with Barclays Capital, said the PDI
\nPerjuangan proposal was a \"source of concern and justify an
\nuptick in risk premiums\" because the fixed exchange rate system
\nwould be at odds with IMF policy and put its whole program in
\nIndonesia at risk.<\/p>\n
Under the IMF's tutelage, the central Bank Indonesia has
\nstriven to preserve the value of the rupiah and soften
\ninflationary pressures.<\/p>\n
\"Given Indonesia's limited foreign exchange reserves, calls
\nfor a fixed exchange rate will always give rise to fears of
\nimposition of capital controls,\" O'Donoghue said.<\/p>\n
Sani of MMS said that the \"best case scenario\" for capital
\ncontrols in Indonesia as part of a compromise by the IMF would be
\nan adoption of the Chilean model.<\/p>\n
Under that model, a portion of capital flowing into the
\ncountry would be entered into a non-interest bearing account in
\nthe central bank which basically made it costly for investors who
\npulled out investments within a short span of time, he said.<\/p>\n
O'Donoghue of Barclays said that until now, the importance of
\nthe Indonesian polls was seen chiefly in terms of producing a
\ngovernment with legitimate popular support, and a mandate to
\nforge ahead with the current successful IMF-led policy mix.<\/p>\n
\"However, as the campaign progresses the rhetoric from some of
\nthe parties suggests a breakdown of this consensus,\" she warned.<\/p>",
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