Eight major issues seen influencing rupiah rate

JAKARTA (JP): The chief executive officer of Standard Chartered Bank in Indonesia, Raymond Ferguson, said here on Tuesday the country would have to live with a volatile rupiah at least for the short term.

"I think there are at least eight major issues that will influence the movement of the rupiah rate," Ferguson said during a seminar on Indonesia's economic recovery.

He cited the performance, and consequently the credibility, of the new Cabinet as crucial in determining the rupiah's rate.

The new Cabinet clearly shows President Abdurrahman Wahid remains the boss, but the market will watch to see Vice President Megawati Soekarnoputri's solidarity with the Cabinet, he added.

"The market is also watching to see as to whether the Cabinet is a group of individuals or is a working team," Ferguson said.

He acknowledged the immediate negative market reaction to the new Cabinet lineup created unwanted pressure.

How the public reacts to the planned increase in domestic fuel prices in October is also a sensitive issue that factors into the market's perception of the rupiah, according to Ferguson.

He recalled how a rise in fuel prices in April 1998 sparked the instability that contributed to the fall of then president Soeharto in May of that year.

Ferguson added that the speed with which the Indonesian Bank Restructuring Agency (IBRA) disposed of the assets under its management, and the impact of the decentralization of political and fiscal power to the provincial and district administrations were other issues likely to influence market sentiment regarding the rupiah.

Standard Chartered's bid to buy part of Bank Bali last year failed after opposition from bank employees, and the announcement that an independent audit had uncovered a scam in the disbursement of the bank's claims on other banks under the management of IBRA.

Ferguson said legal enforcement in cases of nationalist objections blocking the sale of assets to foreigners and bankruptcy proceedings at the Commercial Court was another factor which could influence the market.

The other factors monitored by the market include the progress of the bank restructuring program, the pace and consistency in which reform policies are executed and middle-class consumer confidence, Ferguson said.

"Consumer confidence is quite important right now, especially since government spending is severely restrained," he added.

IMF's senior representative in Indonesia, John Dodsworth, speaking at the same conference, raised concern over deep cuts in the government's capital spending, warning of its impact on the quality of basic infrastructure.

"I think there are limits to these cuts, given their impact on the development and maintenance of infrastructures," Dodsworth said.

The World Bank's country director for Indonesia, Mark Baird, expressed similar concern over the too cautious spending policy of the government.

Baird estimated the actual budget deficit in the current fiscal year (April to December 2000) could range from 1 percent to 2 percent of gross domestic product, compared to the estimated 5 percent to 6 percent.

The lower than estimated deficit should obviously be attributed partly to much higher than expected oil prices, he said.

"But too cautious spending in the public sector also plays its part," Baird added. (bkm/vin)