Currency analyst sees rupiah constrained by political moves

JAKARTA (JP): President Abdurrahman Wahid's move last week to fire a number of Cabinet members will likely reverse the rupiah's upward movement against the U.S. dollar, currency analysts say.

Currency analyst Martin Pangabean said Abdurrahman's recent reshuffling of his Cabinet had caused worries that he would go ahead with his plan to declare a state of emergency.

"The market did not see it (the reshuffle) coming," he told The Jakarta Post on Friday, adding that the created uncertainties had eroded confidence in the rupiah.

The rupiah has been on a upward trend since the House of Representatives' plenary session on April 30 opened the way to the President's impeachment at the upcoming People's Consultative Assembly's special session.

The session, set for August, is expected to dispel the fog over the country's future leadership when the President is asked to present his accountability.

Analysts believe a change in the country's leadership would at least create more confidence in the country's ailing economy.

Last week the rupiah ended at 11,325 against the U.S dollar, up from the previous week's closing at 11,450.

But rumors of a sudden Cabinet reshuffle just before the market closed on Friday pushed the local unit down from Thursday's closing at 11,130.

Ahead of the long weekend, investors were also seen stocking up on dollars to factor in more political surprises.

Martin said that while he could not see any potential upsides for the rupiah, there was no immediate reason to unload the local unit just yet.

"The market needs time to absorb what has just happened," he said.

President Abdurrahman said that the Cabinet reshuffle was an attempt to bridge the gap with his ally-turned-opponent Vice President Megawati Soekarnoputri, who has publicly expressed her readiness to take over the top job.

Former communications minister Agum Gumelar was appointed as coordinating minister for political, social and security affairs, replacing Susilo Bambang Yudhoyono, whom the President once said had the potential to replace him.

Speculation rose that Susilo was dismissed for his refusal to impose a state of emergency, under which the President could dissolve the House and thereby get rid of his political opponents.

With the appointment of Agum, the President hopes to reverse the unfavorable developments.

Agum has close ties with Megawati, and once led the Army's Special Force (Kopassus), suggesting his influence over the military.

With the military distancing itself from the President, his threats against legislators almost ring hollow.

The President also lost the support of the police after his move to suspend National Police chief Gen. Surojo Bimantoro. The police are standing behind Bimantoro in his refusal to step down at the President's order.

Legislators said that by law, any reshuffling in the National Police must have House approval.

Friday's Cabinet reshuffle also saw the dismissals of Sarwono Kusmaatmadja as the minister of maritime affairs and fisheries, and Marzuki Darusman as the attorney general. The former was active in Golkar, the latter is currently the party's deputy chairman.

Marzuki was replaced by Baharuddin Lopa, a human rights advocate who also opposes corruption.

According to Martin, the appointment of Agum and Lopa boost the chances of reconciliation between the President and his deputy.

"The market wants to see what breakthroughs these two men can achieve," he went on to say.

However, Martin continued, selling pressure could arise from corporate demand. A thin dollar supply also makes the rupiah prone to steep falls.

"The market is thin, corporate demand could send the dollar to 12,000," he warned.

Currency observer Rico Menayang said on Monday that with the current political development, most market players would sideline the local currency market.

According to him, fears of inflation could trigger corporate rupiah selling in exchange for dollars needed to import raw materials.

May inflation rose by an alarming 1.13 percent on top of a declining export revenue needed to replenish the local dollar supply.

Rico said the drop in exports was partly because of fewer dollar-denominated investments made, which would have otherwise enabled manufacturers to maintain production levels.

Meanwhile, capital market observer Dandossi Matram said the market index would fall slightly as a result of Friday's Cabinet reshuffle.

"If it (the index) falls, I don't think it will go lower than 380," Dandossi said.

He said that after the Cabinet reshuffle, President Abdurrahman had few options left to surprise the market.

"There are only two ways he could surprise us: declaring a state of emergency or announcing his resignation," he said.

He estimated trading would be flat this week, with the potential of the index recovering to 400. The Jakarta Stock Exchange Composite Index closed last week's trading at 396.51, up from 390.12. (bkm)