Skepticism looms over RI's CBS plan<\/p>\n
HONG KONG (Reuters): Asian fund managers have expressed a high
\ndegree of skepticism over proposals by Indonesia to introduce a
\ncurrency board mechanism.<\/p>\n
They said Indonesia needed confidence rather than a new
\nmonetary system to shore up the rupiah, which Friday was closed
\nat 8,000 to the U.S. dollar after hitting a record low of 17,000
\nlast month.<\/p>\n
\"Re-establishing confidence is of critical importance,\" said
\nMarshall Mays, chief strategist at Nikko Securities.<\/p>\n
Tough action to clean up rotten banks, proof that nepotism and
\ncorruption were things of the past and concrete steps to solve
\nIndonesia's huge private sector debt problem were the only
\npossible routes to a return in confidence, fund managers said.<\/p>\n
\"The real issue in Indonesia is how do we really progress,
\nmove forward on these issues, and I don't think they can be
\nsolved just by a different exchange rate mechanism,\" said Eugene
\nChung, chief Asian investment strategist at SBC Warburg.<\/p>\n
Politics remained the key, the strategists said.<\/p>\n
President Soeharto appears to be backing a currency board as a
\nquicker method of raising the value of the rupiah currency in a
\nbid to bring down prices and help resolve the debt issue.<\/p>\n
Some critics say vested interests in Indonesia see a pegged
\nrupiah as a way of protecting their assets.<\/p>\n
\"It's hugely popular with the crowd in charge right now
\nbecause they have a hope they can hold onto their goodies, where
\nif they have to give up monopolies, do the right thing and
\nrestructure the system, they would suffer,\" said Mays.<\/p>\n
A currency board would fix the rupiah to an external currency
\nsuch as the U.S. dollar or Japanese yen, with full cash-backing
\nfor the amount of rupiah in circulation.<\/p>\n
In theory, the Indonesian central bank would then forfeit
\ncontrol over monetary policy to the United States or Japan,
\nimplying lower rates along with a stable rupiah.<\/p>\n
In practice, Asia's experience with fixed exchange rates has
\ndemonstrated investors' insistence on country risk premiums over
\nand above the rates applied to the external currency.<\/p>\n
\"In Hong Kong, we know from experience that interest rates are
\na function of the risk premium,\" said Chung.<\/p>\n
Those premiums made a substantial contribution to the Asian
\ncrisis. Huge and volatile U.S. dollar inflows seeking high
\ninterest and no currency risk ramped inflation throughout Asia,
\nswelling credit and building unsustainable asset price bubbles.<\/p>\n
Those asset bubbles collapsed like dominoes after Thailand
\ndevalued the baht last July 2, sparking rapid capital flight.<\/p>\n
If Indonesia fixes its currency again, those inflows could
\nreturn and repeat a process clearly identified as dangerous.<\/p>\n
\"The risk that people will borrow U.S. dollars again, assuming
\nits guaranteed, is not inconsiderable,\" said Mays.<\/p>\n
Foreign investors were also skeptical of Indonesia's political
\nwill to allow the currency board to work independently -- and
\nindependence would be key to its successful operation.<\/p>\n
\"We're not even sure we have that political will here in Hong
\nKong,\" said Chung. \"In theory, things can work out beautifully
\nbut in practice, politics does matter unfortunately. Politics is
\neverything in Asia.\"<\/p>\n
Hong Kong has faced criticism for acting to ease the interest
\nrate burden during speculative attacks on the Hong Kong dollar,
\npegged at a rate of HK$7.80 to the U.S. dollar.<\/p>\n
Although most commentators supported the Hong Kong
\nintervention, others argued the currency board should be allowed
\nto work in total isolation from interference, with rates moving
\nonly according to market demand for the domestic currency.<\/p>\n
The fear among foreign investors is that Indonesia will refuse
\nto abide by the currency board when rates shoot high enough to
\ndamage corporate activity.<\/p>\n
Instead of allowing higher rates to force economic adjustment
\n-- bankruptcies or bank failures -- Indonesia could instead
\nresort to printing money to maintain the status quo, the fund
\nmanagers said.<\/p>",
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"sponsor": "Okusi Associates",
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