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)