Rupiah in uncertain times<\/p>\n
Bank Indonesia made the correct decision last week by not
\nusing any of the ammunition in its arsenal to shore up the
\nrupiah, which dropped to a seven-month low of Rp 8,768 against
\nthe dollar on Friday morning before closing the week at Rp 8,380.<\/p>\n
Dipping into its foreign reserves to support the rupiah would
\nhave squandered its small stock of hard currency to maintain a
\ndegree of confidence in the country's economy. The central bank's
\nnet international reserves of US$18.27 billion as of early May
\ncertainly would not be enough to fight speculators.<\/p>\n
Raising interest rates might have aborted the nascent economic
\nrecovery and further increased the state budget deficit to an
\nunmanageable level, because the costs of the almost Rp 310
\ntrillion ($36.5 billion) in treasury bonds already issued to
\nrecapitalize the country's ailing banks would consequently
\nincrease sharply. Moreover a widely predicted monetary tightening
\nin the U.S. would most likely nullify the impact of any rise in
\ndomestic interest rates.<\/p>\n
That is because the market's negative sentiment on the rupiah
\nhas been fueled by a barrage of confusing remarks by senior
\ngovernment officials, political controversy over the Cabinet's
\neconomic team and uncertainty about the future of the reform
\nmeasures that are sorely needed to stabilize and strengthen the
\nfoundations of the economy. Needless to say, the financial market
\nis highly sensitive to (mis)information and rumors.<\/p>\n
The market has been nervous since late last month, following
\nthe political controversy and questionable reasons behind the
\nfiring of two key economics ministers, one in charge of industry
\nand trade, the other state enterprises and investment.<\/p>\n
Market jitters increased early this month after the government
\nand the International Monetary Fund failed to agree on a new set
\nof reform measures for a new letter of intent. Despite the
\ngovernment's claim the delay was simply technical, analysts saw
\nthe further postponement of the signing of the letter of intent
\nas proof of the government's inability to reach a rapport with
\nthe IMF. This followed the multilateral agency's decision to
\ndefer the second disbursement of its loans to the country from
\nthe original schedule of early April, because of its
\ndisillusionment with the slow pace of reform over the past three
\nmonths.<\/p>\n
Adding to the uncertainty was President Abdurrahman Wahid's
\nappointment of two close aides to a special team in charge of
\nmonitoring the performance of the Cabinet's economic team, a
\nfunction that was understood to be the responsibility of the
\nNational Economic Council.<\/p>\n
This move, in addition to the President's decision early this
\nmonth personally to lead weekly Cabinet sessions on economic
\nmatters, increased speculation that the job of chief economics
\nminister Kwik Kian Gie, one of the few ministers in the Cabinet
\nhighly respected for his impeccable integrity and hard work, was
\non the line. Kwik's pessimistic comments last week about foreign
\ninvestor confidence in the country, though accurately reflecting
\nconditions, poured fuel on the rumors that Kwik was indeed
\nfrustrated with the internal hurdles he faced in managing the
\neconomy.<\/p>\n
Market confidence in the country's economic management took
\nanother dive after mass media coverage of alleged corruption,
\ncollusion and nepotism among Abdurrahman's relatives and close
\nassociates, and the confirmation that Abdurrahman's younger
\nbrother Hasyim Wahid was assigned as a special adviser to the
\ngovernment's most powerful economic organization, the Indonesian
\nBank Restructuring Agency.<\/p>\n
Even though the rupiah's recent plunge did not necessarily
\nreflect, nor immediately cause, deteriorating economic
\nfundamentals, a prolonged volatility would eventually abort the
\nbudding economic recovery.<\/p>\n
But market intervention by the central bank would not be
\neffective in stabilizing the rupiah. The best way to safeguard
\nthe currency is for the government to act firmly to restore
\nmarket confidence in its economic policymaking and execution and
\nin the consistency of the reforms it is and will pursue. A clear
\nendorsement by the IMF of the country's new set of reform
\nmeasures would greatly help accelerate the process of regaining
\nmarket confidence.<\/p>",
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