Asian currencies firm as Jakarta steps up reform

Asian currencies firm as Jakarta steps up reform

SINGAPORE (Reuters): Asian currencies kept on firm ground yesterday as Indonesia headed further down the reform track and the dollar lost its footing against the yen.

Indonesian Coordinating Minister for Economy and Finance Ginandjar Kartasasmita said Jakarta had implemented all the measures falling due this week under its new IMF agreement. Key changes include the replacement of a ban on palm oil exports with a 40 percent tax and a presidential decree amending the bankruptcy law.

He said in a statement the IMF would hold a board meeting on May 4 to decide on releasing the second $3 billion tranche from its rescue package.

It said the rupiah should continue to strengthen until it reaches an "acceptable level", reflecting the country's economic strength.

The statement added that interest rates could be lowered once the exchange rate was restored and inflation brought under control.

The next meeting of Indonesia's creditors and companies was set for May 8-10 in Tokyo. Chief debt negotiator Radius Prawiro said the talks would focus on trade finance and money market lines.

The rupiah held above the 8,000 per dollar level, drawing strength from Bank Indonesia's interest rate hikes on Tuesday.

"The Indonesian rupiah still remains the stand-out in terms of under-valuation in the region. Even with inflation at levels of 30 to 40 percent, the rupiah is undervalued...We should see it breaking into the low 7,000s," said Ron Leven, head of Asian local markets research at J.P. Morgan in Singapore.

But he noted that Jakarta's exchange rate target of 6,000 for the rupiah might be difficult to achieve because it would require high interest rates to be maintained for longer than the economy could tolerate.

Elsewhere, the Malaysian ringgit was firm despite Prime Minister Mahathir Mohamad's comment late on Tuesday that the government was studying lowering interest rates.

Dealers appeared to rule out the likelihood of a near-term easing and said the ringgit was on track for a technical target of 3.68 to the dollar despite Malaysia's continuing corporate worries.

Mahathir also said the economy had a "fair chance" of growing at between two and four percent this year.

But a Reuters poll of 10 economists said Malaysia's gross domestic product was expected to slow sharply to 0.8 percent this year from an estimated 7.6 percent in 1997.

"I think a recession in Malaysia at this point is unavoidable ... and that's probably why Prime Minister Mahathir has hinted at the option of lowering rates," Eddy Lee, regional economist at Vickers Ballas, told Reuters Television yesterday.

Malaysia's housing market slowed in the second half of 1997, and the government said sales may for the first time fall in the first quarter of this year.

Spark

The Thai baht hovered around the 39 level to the dollar, buoyed by demand for investment in shares and property, sparking interbank dollar sales.

Thai deputy finance minister Pisit Leeahtam said in Denmark on Tuesday the baht had found equilibrium around 40 per dollar, triggering some speculation of a possible interest rate cut.

Pisit declined to forecast the baht's direction, but said further appreciation would put pressure on inflation.

He also said Thailand's GDP would contract by around 3.5 percent this year, having been roughly flat in 1997.

The Singapore dollar firmed with the yen's recovery after slipping earlier on a research report by Santander Investment saying Singapore's economy could enter a recession this year.

In South Korea, the government's official think-tank said the economy could contract by three percent this year if financial and corporate restructuring was delayed.

The Korea Development Institute also said it would cost 67 trillion won over five years to restructure the troubled financial sector.

The won was steady as late dollar short-covering wiped out early gains amid ample won liquidity after the central bank's reserve requirement was met.

The Taiwan dollar softened on importer dollar demand but trade was slow after the central bank's recent tightening of controls on non-deliverable forwards trading.

Central bank governor Perng Fai-nan said the bank would allow new hedging products in the forex market, but gave no details of what was planned.