Govt allays fear of devaluation

Govt allays fear of devaluation

JAKARTA (JP): Fears over the devaluation of the rupiah are unfounded and Minister of Finance Mar'ie Muhammad says the Indonesian economy is in solid condition.

"The Indonesian economy bears no resemblance at all to that of Mexico. Worries over the possible devaluation of the rupiah are, therefore, an overreaction," he told newsmen in response to mounting anxieties over a possible devaluation of the rupiah.

Mexico devalued its currency on Dec. 20 by 15 percent, which sparked chaos in its economy. The peso has lost nearly 70 percent of its pre-devaluation level against the greenback, affecting the world's financial markets.

Mar'ie said yesterday that Mexico's economic crisis was not only caused by a huge debt problem but also by their high current account deficit.

Fears of a Mexican-style capital outflow continued in Asia's emerging markets, including in Indonesia, the Philippines and Thailand.

The rupiah remained volatile yesterday as foreign fund managers dumped the currency and bought U.S. dollars and other foreign units, fearing that Indonesia, which is also heavily indebted, could do the same.

"The rupiah is still under heavy selling pressure as the demand for the American dollar remains strong," said a foreign exchange dealer at a joint venture bank said.

The value of the rupiah against the U.S. dollar, which dropped to its lowest level of 2,285 on the spot market Thursday, slightly strengthened to 2,230 yesterday morning. It further inched up to 2,219 later in the afternoon following Bank Indonesia's intervention to stabilize the market.

The minister said that Indonesia's foreign reserves are still at a safe level despite the country's high amount of foreign loans, estimated to reach US$100 billion next year.

Healthy

Economic analysts also described the reaction to the Mexican devaluation measure as unfounded.

James W. Castle, the president of Business Advisory Indonesia, said that there was no chance of rupiah devaluation under the current economic condition.

"The Indonesian economy is very solid and I am quite confident that the government will not take a devaluation measure," he said, while saying that Indonesia's economic fundamentals, such as foreign reserves and current account deficit, are relatively more healthy than those of Mexico.

Castle said that the upward trends in Indonesia's exports would continue in the wake of economic recovery in the major markets.

"The rise in non-exports will make the country's balance of payments even sounder," he said.

Mohammad Sadli, a senior economic analyst, said that likening the Indonesian economy to Mexico's is illogical but that the fast movement of funds from one country to another is part of economic globalization.

"Jittery fund managers are not well informed about the sound condition of the Indonesian economy and that's why they are very cautious," he said.

Another analyst said, however, that the overreaction of fund managers to Mexico's capital outflow are understandable, given the nature of their business.

He said that fears of a fresh devaluation measure emerged as many people were traumatized by the impact of the past devaluation.

The government devalued the rupiah substantially in September 1986 in the wake of the sharp drop in oil prices. However, since 1986, the government has adopted a slow depreciation policy in maintaining the competitiveness of the rupiah by adjusting its value against foreign currencies on a day-to-day basis.

In this 1994-95 fiscal year, which will end in March, the depreciation of the rupiah against the dollar is limited to around four percent.

"By using the slow depreciation policy, a devaluation like in the past is no longer needed," said Sadli, who is a former cabinet minister.

The economists said that the future of Indonesia's economy lies in the ability of the Indonesian government to stimulate exports to curb a possible increase in the country's current account deficit.

Hamzah Haz, a member of the House of Representatives (DPR), said that the sharp growth in imported capital goods, expected to result from the increase in new investment approvals last year, could considerably hurt the country's balance of payments if no appropriate measures are taken to increase non-oil exports.

The current account deficit is estimated to grow to US$4.09 billion in 1995-96 from the estimated $3.56 billion this fiscal year and $2.94 billion in 1993-94. (rid/hdj/hen)