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)