BI says forex reserves enough to defend rupiah

The Jakarta Post, Jakarta

Bank Indonesia said on Friday it was ready to intervene in the currency market to protect the rupiah amid worries that domestic antiwar protests could turn violent.

Bank Indonesia Governor Sjahril Sabirin said on Friday that the country currently had more than enough foreign exchange reserves to defend the local currency.

"We will continue to rely on intervention and money market operations to help the rupiah," Sjahril said as reported by Dow Jones.

The country's foreign exchange reserves currently stand at about US$31 billion.

The rupiah has been relatively stable since the U.S. launched its attack on Iraq. The local unit closed slightly stronger on Friday at Rp 8,965 per U.S. dollar from Rp 9,030 on Thursday.

But it is expected that the war in Iraq will spark nation-wide protests, which could create negative sentiment and put pressure on the local unit, particularly if the rallies turn into violent anti-Western protests.

There are fears that this situation could develop if the war drags on for a long time.

Even during the run-up to the war, most Indonesians made it clear they opposed any military solution to the U.S.-Iraq standoff. The fact that the war is being conducted despite the absence of UN support adds to the opposition here.

Such fears are understandable given the country's past experiences with anti-Western protests.

There was a wave of anti-Western rallies here in late 2001 following the military strikes on Afghanistan by the U.S. and its allies.

At the time, militant groups also conducted "sweeps" against foreigners in the country, prompting several foreign firms to temporary halt business operations.

If this were to occur again, it would create jitters in the currency market and put pressure on the rupiah, which in turn would undermine the country's economic recovery.

But Sjahril said that so far protests had been relatively peaceful, contributing to the relatively stable rupiah.

Elsewhere, Sjahril said that to help limit the negative impact of the Iraq war on the country's economy, the central bank would continue to guide interest rates lower.

But he was quick to say the pace of the rate decline would be slower than initially projected due to the war.

The central bank has been guiding its benchmark interest rate lower for the past year. The interest rate is now above 11 percent, compared to more than 17 percent late in 2001.

A lower interest rate environment would help ease the burden on the state budget in covering the interest rate on the government's huge domestic debt.

The lower rate is also expected to make bank borrowing cheaper for the real sector, allowing for expanded operations.