BI to prevent rupiah from further tumble

BI to prevent rupiah from further tumble

PRAGUE (Dow Jones): The Indonesian central bank would use all available policy tools to prevent the rupiah from falling beyond 9,000 to the dollar on political worries, the acting governor of the bank said Sunday.

Anwar Nasution said the bank is prepared to use its foreign exchange reserves, enforce anti-speculation rules and perhaps raise interest rates to support the currency, which has taken a battering following the recent bombing of the Jakarta Stock Exchange that killed 15 people.

"We are willing to defend the rupiah," Anwar told Dow Jones Newswires on the sidelines of the International Monetary Fund and World Bank annual meetings.

"There is no reason for a weakening of the rupiah. There are signs the economy is growing strongly - exports, both oil and non-oil are good," he said.

Anwar said the disarming of pro-Jakarta militia in West Timor and the "good news" he expects will come out of a meeting next month of foreign creditors under the Consultative Group on Indonesia should ease pressure on the rupiah.

Indonesia's government debt totals $135 billion, $75 billion of which is foreign.

World Bank President James Wolfensohn has said that if Indonesia wants a successful outcome from the Tokyo CGI meeting, it must stop the violence in West Timor that left three United Nations aid workers dead earlier this month.

But with violence continuing in the strife-torn province of Aceh and relations between the government and supporters of former president Soeharto still extremely strained, analysts expect the rupiah will weaken toward Rp 9,000.

The rupiah slipped to Rp 8,838 against the U.S. currency in late trading on Monday from Rp 8,805 on Friday on dollar-demand from local banks, dealers said.

Still, dealers said they couldn't find an exact reason for the local banks' dollar demand. "It seemed that they buy the dollar for their own, not on behalf of their customers," one dealer added.

Most offshore participants stayed on the sidelines keeping their dollar long positions, dealers said.

Anwar said the bank is well-placed to support the currency because of its plentiful foreign currency reserves - $27 billion in net terms - thanks to high oil prices and strong exports.

With oil prices near 10-year highs, Indonesia - Asia's only member of the Organization of Petroleum Exporting Countries - is making windfall gains from royalties on oil output as its budget was based on much lower oil prices.

The central banker, who was appointed in July after Governor Sjahril Sabirin was detained amid allegations of corruption, said a dollar rate below Rp 8,000 is more reflective of economic fundamentals.

Authorities extended Sjahril's detention last week for another month - the last permitted under local law. Sjahril has vigorously denied the corruption charges.

Anwar said the central bank will continue to enforce currency rules introduced to curb speculation in the rupiah.

"We will enforce the rules," he said, referring to limits on forward positions in the local currency.

If the rupiah remains weak, Bank Indonesia would also consider raising interest rates to combat import price inflation, but only if progress has been made on bank restructuring, Anwar said.

Analysts say higher rates could make the cost to the government of bailing out banks prohibitive. The administration has recapitalized the banks with bonds that carry coupons linked to the benchmark interest rate.

"We are flexible (on raising) interest rates if restructuring pushes ahead," Anwar said. He reaffirmed that inflation is likely to rise by between 7 percent and 9 percent in the year to the end of December.

Turning to urgings over the weekend by the Group of Seven industrialized nations for OPEC members to "take actions to contribute to a reduction in oil prices," the central banker said current prices are due to demand as well as supply issues.

"I think they should certainly consider lowering taxes," he said, referring to high taxes on oil in many Western countries.

Oil producers argue that these should be lowered to reduce the consumer cost of oil and therefore the drag on the world economy. However, some leaders of industrialized nations maintain that lowering taxes will merely spur demand and put further pressure on prices.