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.