Currency peg reports cause rupiah to soar

Currency peg reports cause rupiah to soar

JAKARTA (JP): The rupiah surged against the U.S. dollar
yesterday on reports that the government might peg the currency
to the greenback.

Currency dealers said that spot rupiah closed at 7,400/7,600
against the U.S. dollar from its opening of 8,700/8,900 in the
morning trading session.

Yesterday's close was far higher than the previous day's close
of 9,600.

Dealers said foreign market players were reluctant to take any
long position on the dollar on reports that the government would
peg the rupiah to the greenback.

"Some Japanese banks sold large amounts of dollars to buy
rupiah in the foreign exchange market. They wanted to unwind
their long position on the dollar," the dealer said.

"The rupiah was able to quickly gain ground against the dollar
because the trading volume was thin," he added.

President Soeharto said Monday that the government would soon
announce new steps for the foreign exchange system to stabilize
the country's battered currency.

The President's statement drew speculation that the government
would establish a currency board system, which would peg the
rupiah to the dollar at the 5,000 level, one dealer said. "This
prompted massive selling of American dollars," he said.

The government's revised budget for fiscal year 1998/1999
assumes an average exchange rate of Rp 5,000 to the dollar.

Yesterday, Bank Indonesia Governor J. Soedradjad Djiwandono
said the government was still studying the currency board system.

Senior officials at the Ministry of Finance, however, said
that it would be difficult for Indonesia to peg the rupiah
against a foreign currency, given the poor performance of its
commercial banks and the limited amount of its foreign reserves.

The currency dealers also attributed the strengthening of the
rupiah to the government's plan to boost the minimum paid-up
capital requirements for local banks.

"The new capital requirement announced by the central bank
sent a positive sentiment to the market," another dealer with a
local private bank said.

Each bank in the country would be required to increase their
paid-up capital to Rp 1 trillion by the end of this year, Rp 2
trillion by the end of 1999 and Rp 3 trillion by the end of 2003.

Share prices

As the rupiah gained a better footing against the dollar,
stock prices in the Jakarta Stock Exchange (JSX) fell 2.18
percent as blue chip shares such as Telkom and Indosat declined
sharply on massive selling by most foreign investors.

The JSX Composite Index fell 11.55 points to 517.7 points
yesterday from 529.25 the previous day with 981.83 million shares
changing hands on the regular market valued at Rp 944.56 billion
(US$125.94 million).

Stockbrokers said that several second-line stocks, especially
from the banking sector, made big gains yesterday on renewed
market sentiment following the central bank governor's
announcement to tighten capital requirements in the country's
banking system.

Some analysts, however, said the country's political
situation, which was marked by sporadic riots in several small
towns due to escalating prices of basic essentials, remained a
barrier for most investors to make any long-term investment
decisions in the country's market.

"How can we expect foreign investors to stay long in the local
market if political stability remains uncertain," an analyst who
asked for anonymity said. (aly)