Currency peg disadvantageous for RI: Analysts

Currency peg disadvantageous for RI: Analysts

JAKARTA (JP): The establishment of a currency board system
(CBS), which would peg the rupiah to a foreign currency, would be
disadvantageous for Indonesia, analysts have said.

Economic analysts claimed yesterday that setting up a CBS
would not directly solve the alarming problems of food shortages,
unemployment, troubled banks, corporate foreign debts and
political uncertainty.

They stressed that the country would do better by sticking to
its reform commitments in dealing with the current economic
crisis.

They also foresaw many long-term dangers if such a system were
enacted.

In the short term, the CBS could make domestic interest rates
increase, threatening ailing domestic banks and cash-strapped
local businesses, the analysts, most of whom requested anonymity,
said.

The rupiah rallied yesterday, boosting other Southeast Asian
currencies on reports that it could be pegged to the U.S. dollar.

The rupiah closed at 7,400 against the U.S. dollar, up sharply
from its close of 9,600 Monday when President Soeharto indicated
he was considering fixing the rupiah's rate to "kill"
speculators.

Supporters for the CBS urged the government to peg the rupiah
to the U.S. dollar at the 5,000 level, equivalent to the target
set in the government 1998/1999 draft budget.

"To prevent a rush for dollars when the CBS is installed,
interest rates could be boosted," said an analyst at a foreign
exchange bank in Jakarta.

Analysts pointed out that in the long term, a CBS could
potentially erode the country's trade balance and current
account.

"The peg system may cause a deterioration in Indonesian export
competitiveness," said Raden Pardede, an economist with state-
owned PT Danareksa Securities.

The CBS is probably being considered because some analysts
believe it can contain inflation.

In tandem with a rigorous US$43 billion International Monetary
Fund-sponsored bailout package, the government has projected zero
economic growth this year with higher unemployment and a 20
percent inflation rate -- ingredients for potential social
unrest.

Despite government assurances that it is committed to the
wide-ranging reforms connected to the IMF package -- including
slashing monopolies and allowing foreigners to enter into almost
all sectors of the economy -- the rupiah has remained sharply
undervalued.

The currency has lost 75 percent of its value from its level
of Rp 2,450 against the dollar last July.

Early this month, U.S. economist Steve Hanke, a persistent
advocate of the CBS, spent an hour discussing the system's merits
with President Soeharto and his key economic adviser, Widjojo
Nitisastro.

The President said Monday that he would find ways to fight
currency speculators, prompting opinions that he was talking
about the CBS.

"Soeharto seems to be entertaining this idea because a
currency board would answer the solvency problems of many debt-
ridden corporations," said an analyst.

He added that the idea seemed to be a short cut for the aging
leader to bring back financial stability.

Analysts believe the rupiah crisis is partly due to the
country's mounting corporate foreign debt problems. The
government recently announced that overseas debts for local
private companies amounted to $23 billion.

The analysts said the CBS might not be a solution to the debt
crisis. "Even at the Rp 5,000 level, not all companies could
service their foreign debts," said an analyst with a joint-
venture securities firm.

He added that the setting up of a CBS might prompt debt-ridden
companies to compete for the available foreign reserves, a
situation that could induce ordinary people to follow suit.

He explained that Indonesia's money supply totaled some Rp 75
trillion. To bring the exchange rate to the Rp 5,000 level, Bank
Indonesia would have to put up $16 billion to cover the system.

The central bank has stated that its foreign exchange reserves
total about $18 billion.

The analyst said the remaining $2 billion would be too small
to service the country's foreign obligations.

"The only way to prevent such a stampede is to extend the
repayment freezing policy," he pointed out.

"The feasibility of the CBS will depend on whether the
government could provide political certainty, that investing in
Indonesia is safe," he said. "Otherwise people will continue to
change their local assets into dollars," he added.

He said the CBS had several advantages, including providing
certainty in the rupiah's conversion rate, creating confidence in
the country's monetary system and instilling macroeconomic
discipline that limits budget deficits and inflation since the
government would limit rupiah circulation to the amount of U.S.
dollars it held.

Nevertheless, some analysts opined that giving up the exchange
rate system would be too much of a gamble in the longer term.

"We are in favor of doing our homework by staying on the
course of reforms by resolving debt and banking problems," said
Danareksa's Raden.

Several Indonesian businessmen expressed support for an
adoption of the CBS. They include Boyke Gozali, president of Bank
Tiara; Soebronto Laras, president of Indomobil Corp.; and Rossano
Barrack, vice president of the Bimantara Group.

But Benny Santoso, finance director of the Salim Group,
Indonesia's largest conglomerate, said it would be wise to first
study the system's advantages and disadvantages before making a
decision.

A senior economist at Gadjah Mada University, Sudijono
Reksoprajitno, proposed an alternative, which he called the
steady growth exchange rate system. This would allow for a
limited daily appreciation of the exchange rate by 0.06 percent,
for instance. (08/23/aly)