Bank Indonesia sees improving sentiment in the currency mart

JAKARTA (JP): Bank Indonesia Governor Sjahril Sabirin said on Wednesday that the currency market was now less jittery about the country's political situation which is reflected in the strengthening rupiah.

Sjahril reaffirmed his optimism that the government target of Rp 7,000 per dollar in the April-December 2000 budget year would be achievable.

"The rupiah strengthens because of improving market sentiment toward the domestic political situation ... there's no intervention (from the central bank)," he told reporters on the sidelines of a hearing between the central bank and the House of Representatives commission IX on banking and the state budget.

"People who previously bought dollars may have stopped buying them because it's now less jittery," he added.

The rupiah strengthened to Rp 7,280 per U.S. dollar on Wednesday from Rp 7,420 on Tuesday.

The rupiah has strengthened over the past two days after it tumbled to around Rp 7,700 per dollar recently in the wake of the stand off between President Abdurrahman Wahid and former armed forces commander Gen. Wiranto, now the Coordinating Minister for Security and Political Affairs.

There have also been rumors that the Military was attempting to launch a coup against the new democratically elected government while the President is overseas.

But Abdurrahman's comment that he would pardon Wiranto if he's proven guilty of human rights violations in the former East Timor has eased domestic jitters, currency dealers said.

Abdurrahman is expected to arrive home from his two-week overseas trip on Sunday.

Sjahril declined to make a projection, but said: "If the political situation continues to improve, the direction of the rupiah will be toward the Rp 6,000-7,000 level."

"The development of the rupiah is now much more affected by the domestic (political) situation," he added.

Sjahril stressed that it would be difficult for the central bank to make market "interventions" -- selling dollars to shore up the rupiah -- if the reason for the weakening local currency was domestic political upheaval.

"There's not much use of making an intervention if the rupiah is weakened by political factors," he said.

"(But) it will also depend on how far the rupiah falls," he added.

Sjahril said that a stable political situation was crucial to ensure that the government and the central bank policies work effectively.

He pointed out that the central bank would be forced to adopt a tighter monetary policy to defend the rupiah if it faces a serious threat from the political front.

Asked about the direction of the central bank interest rates, Sjahril said that there's now very limited room for the interest rate of the one-month Bank Indonesia SBI promissory note to decline further.

"I think the current interest rate is ideal," he said.

The interest rate of the one-month SBI note fell to 11 percent on Wednesday from 11.04 percent last week.

Separately, Bank Indonesia senior deputy governor Anwar Nasution said that the uncertainty in the domestic political situation had been the major factor discouraging investors from buying into government bank recapitalization bonds.

"People are still adopting a wait and see approach because of the domestic political situation," he said on the sidelines of the hearing session.

The government had injected Rp 282 trillion worth of bonds into the country's recapitalized banks in a bid to help lift their capital adequacy ratio to the minimum 4 percent level.

Around Rp 2.6 trillion of the bonds from 12 recapitalized banks were allowed to be traded on the Surabaya Stock Exchange last week, but so far no transaction has occurred.

Anwar said that it is important for the banks to be able to sell the bonds. Bond sales would provide banks with the necessary cash to resume lending to the country's ailing business sector.

But Anwar said that the structure of the bonds was less attractive to investors amid the current political uncertainty.

"The bonds are not attractive because they are long-term bonds maturing in three to ten years with a variable interest rate. No one really knows where interest rates will go from here due to political uncertainty," he said.(rei)