Central bank intervention needed

Central bank intervention needed

With economic growth of over 6 percent and a budget deficit of
(in the worst case) only 1 percent in 2005, Indonesia's
macroeconomic picture appears very good. In view of this, I find
the ongoing pressure on the currency difficult to understand.

Further, Indonesia is less dependent on oil imports than all
other Asian countries with the exception of Brunei. Yet the
currencies of these other countries remain firm against the
dollar.

Indonesia remains a net exporter on the energy account,
including LNG, so the frequently aired view that oil imports are
pressuring the economy makes little sense. This assumes, of
course, that all the dollar proceeds from energy exports are
being repatriated. The central bank should be in a position to
supply Pertamina directly with all the dollars it needs using the
proceeds from energy exports.

The forex market in Indonesia, again without Pertamina open
market transactions, remains relatively small, such that central
bank intervention should be highly effective in maintaining a
currency range, just as in Singapore for instance.

Perhaps the missing ingredient is confidence, which requires
effective communication with the markets from both the central
bank and the government. Alternatively, and more disturbingly, it
would be of concern that undisclosed issues regarding the true
situation with the currency account and currency repatriation are
at play.

PHILIP TOWNSEND, Bali