Economic gains 'fail to boost rupiah'

JAKARTA (JP): The country's encouraging economic developments have failed to strengthen the rupiah because the financial market has yet to perceive the gains, according to Deutsche Bank AG Asia chairman Hubert Neiss.

"The economic recovery is growing, but why is the rupiah still weak? This is because there's a difference between reality and perception. The perception of the people and the market is that the economy is much worst than it actually is," he told The Jakarta Post on the sidelines of a conference on telecommunications and information technology.

"What is necessary is to change the perception and raise confidence. Then the rupiah will turn around," added Neiss, who is the former IMF Asia Pacific director.

Neiss helped design Indonesia's economic reform program in late 1997 following the outbreak of the economic crisis. He left the IMF earlier this year.

The rupiah has depreciated by more than 18 percent since the start of the year, ending trading on Friday at around Rp 8,765 to the U.S. dollar.

The exchange rate is much lower than the government's target for 2000 of Rp 7,000 against the dollar.

A stronger and stable rupiah is seen as a cornerstone for the country's sustained economic recovery.

Neiss said that in order to change the market's perception and revive confidence in the economy, "the government must project the image of being fully in charge and progressing consistently and vigorously on the program that it has set up and (that has been) accepted by the IMF".

"Just implement the program. Don't miss deadlines again. This is important for confidence," he said.

The government was roundly criticized for failing to meet a March deadline for the implementation of a host of key economic programs, prompting the IMF to delay a second disbursement of its loan to Indonesia from the initial schedule of April to May.

The failure to meet the deadline and the delay in the IMF loan disbursement badly affected the rupiah.

The IMF agreed with the administration of President Abdurrahman Wahid in January to provide a new US$5 billion bailout package to finance the country's three-year economic reform program. The fund has so far disbursed more than $700 million of this package.

Coordinating Minister for the Economy, Finance and Industry Kwik Kian Gie said last week the government was on track to meet a July 5 deadline for the implementation of a host of reforms. This would allow the government and the IMF to sign a new letter of intent (LoI) in the middle of this month, paving the way for the disbursement of another $380 million of the IMF loan early next month.

An LoI is basically a set of economic reform programs to be implemented by the government within a certain time frame.

Neiss said Indonesia's economy had been showing positive progress, as evidenced by growth in gross domestic product (GDP), easing unemployment, strong exports and balance of payment, and low inflation.

"The Indonesian economy is recovering very well," he said.

The Central Bureau of Statistics (BPS) reported on Friday encouraging economic data that seemed to support this statement.

The BPS said inflation increased 0.5 percent in June, down from an 0.8 percent increase in May.

Many analysts said the government's 5 percent to 7 percent inflation target for the year was within reach, although the government is scheduled to raise fuel prices in October.

BPS reported a 2.94 percent decline in total exports in May to $4.8 billion, from $4.9 billion in April.

However, BPS said total exports from January to May reached $23.9 billion, or around 32.3 percent higher than the $18.09 billion in total exports over the same period last year.

Imports, on the other hand, rose 1.15 percent in May to $2.35 billion, from $2.33 billion in April. Indonesia's export sector, as well as the country's overall production system, still depends on imported raw materials.

"Our industries are already too dependent on imported raw materials, so an increase only shows that production is improving," said BPS deputy chief Kusmadi Saleh.

The government has said it is convinced the 4 percent GDP growth target for the year can be achieved.

Asked about recent increases in the benchmark interest rate of Bank Indonesia's one-month SBI promissory note, Neiss said the current level of the interest rate was not yet a threat to the overall economy.

He said increases in the benchmark rate was a response to the weakening of the rupiah. "But I would not expect Bank Indonesia would push interest rates to levels that would be adverse to the economic recovery, because recovery is a high priority."

The benchmark interest rate has climbed for eight consecutive weeks to 12.33 percent on Wednesday, its highest level since early this year.

Bank Indonesia has said the rate increase was only temporary and expects it to decline to below 12 percent by the end of this year, assuming domestic social and political uncertainties subside.

Neiss also called on the Indonesian Bank Restructuring Agency to accelerate the disposal of the assets under its controls, to help restore investor confidence in the economy.

He also said the government must press ahead with the restructuring of corporate loans. "The government must also immediately complete the reorganization of state banks," he added. (rei)