Asian markets brace for chaos over rupiah's peg
Asian markets brace for chaos over rupiah's peg
SINGAPORE (AFP): Asian foreign exchange and stock markets could face renewed volatility this week amid fears of a standoff between Indonesia and its creditors over Jakarta's plans to peg its currency, economists said.
Concerns over racial riots triggered by rising food prices in Indonesia, as President Soeharto awaits confirmation for a seventh five-year term, also undermined since early February a strong recovery in Asian financial markets.
The main worry is that Jakarta would impose a Hong Kong-style peg despite insufficient monetary safeguards and foreign reserves and stern warnings from IMF and U.S. officials.
"Indonesia is the key," said Daniel Lian, head of Asian markets research at ANZ Investment Bank in Singapore.
He said there was "no credible opposing force" within Indonesia to stop the plan, and "the only credible opponents" were the International Monetary Fund (IMF), the World Bank and the U.S. Treasury.
Dealers expect Jakarta to aim for a peg of Rp 5,000-Rp 6,000 to the dollar under a currency board system using foreign reserves to back a fixed rate. The currency closed Friday around Rp 8,200 to the dollar.
Lian gave Indonesia only a 50 percent chance of convincing its creditors to allow a pegged-rate system before or right after a special assembly packed with Soeharto backers convenes early March to elect the president and vice president.
The Washington Post reported over the weekend that IMF managing director Michel Camdessus wrote to Soeharto threatening to cut off rescue money unless there is greater evidence of economic reform.
U.S. President Bill Clinton has also reportedly called Soeharto to support the IMF position against a currency board.
The IMF brokered a US$43 billion bailout for Indonesia, to be released in stages linked to economic and financial sector reforms.
"In the current circumstances ... if a currency board proposal were adopted, we would not be able to recommend to the IMF board the continuation of the present program, because of the risks to the Indonesian economy," the Washington-based IMF chief was quoted as telling Soeharto.
Southeast Asian stock markets along with the Hong Kong bourse were hit by heavy selling toward the end of last week amid negative signals from Indonesia, Southeast Asia's largest economy with over 200 million people.
"I think markets will remain edgy, with any kind of negative news likely to push all the regional currencies much lower," said Nizam Idris, a currency analyst in Singapore with London-based research house IDEA.
"Good news will probably be seen as a relief but bad news will trigger fresh losses," he added.
He said Indonesia had lost "quite a bit of ammunition" in the battle to defend the rupiah following the disclosure that foreign reserves had fallen from $19 billion to $17 billion in just two weeks.
"If the rupiah falls below 10,000, I think it could head to 12,000 again," he said. The rupiah's record low was 16,500, set in January.
The rupiah fell to 9,500 on Friday before clawing back to 8,200 at the end of Asian trade as players cautiously bought it up again before the weekend on fears that the peg could still be imposed.
U.S. Treasury Secretary Robert Rubin and Federal Reserve Board chairman Alan Greenspan have warned Indonesia against rushing into a currency board regime.
In a further sign of U.S. concern, U.S. ambassadors from across Southeast Asia will gather in Singapore this week to discuss the Asian financial crisis with visiting U.S. Commerce Secretary William Daley.
The Singapore dollar closed Asian trading Friday at 1.6500 to the U.S. dollar, the Malaysian ringgit at 3.7200, the Thai baht at 46.10, the Philippine peso at 40.35 , and the Taiwan dollar at 32.820, after bouncing back from lows stemming from the rupiah's instability.
The South Korean won enjoyed a respite, stabilizing around 1,620 to the dollar after militant unions called of a planned strike by 100,000 workers.