Economic gains 'fail to boost rupiah'

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)