Thu, 25 Aug 2005

Govt takes no action as rupiah dips

Urip Hudiono, The Jakarta Post, Jakarta

Rather than taking real actions to send positive signals to the market and prevent the rupiah from falling, President Susilo Bambang Yudhoyono instead appealed to the nation "to stick together for more constructive measures" to overcome the situation.

No concrete measures were offered by the President to calm the market at a time when the rupiah showed no signs of ending its downward slide, closing on Wednesday at Rp 10,271 a dollar, down 1.8 percent from Tuesday's closing of Rp 10,090, its lowest since February 2002.

Susilo met with Bank Indonesia on Wednesday evening to address the issue.

The currency has so far depreciated by 9 percent throughout the year, which is among the worst performing currencies in the region.

The rupiah kept weakening as local demand for the American greenback for import needs -- particularly for oil imports -- continued to overwhelm the scarce supply of dollars in the country from exports and investment.

The situation has only worsened as global oil prices have recently been on an upward trend, lingering above $60 a barrel.

Although Indonesia exports oil, the country is likely to be a net oil importer this year. It also exports its oil based on the Indonesian Crude Price, which is lower than the international oil price.

The rupiah's constant decline has created a domino effect, as Indonesia's stock and bond prices also fell, on fears that the central bank will raise key interest rates to support the currency.

On the back of the rupiah's latest slump, Indonesia's main stock index fell 2.9 percent, after the central bank raised a key interest rate to help boost the rupiah from a three-year low.

The Jakarta Composite Index fell for the ninth straight trading day, closing 2.9 percent down to 1035.45.

Meanwhile, the price and yield of Indonesian bonds were also affected by the rupiah's slump.

The price of Indonesian bonds due in June 2013 fell 1.75, or Rp 17,500 per 1 million, to 100.25. Its yield rose 37 basis points to 14.18 percent, according to Deutsche Bank International.

Despite the gloomy situation, the government still showed no particular concern, convinced that the rupiah's movement is according to market forces.

"Our foreign exchange reserve is still safe," Coordinating Minister for the Economy Aburizal Bakrie said, while blaming the rupiah's current state partly on the rising state budget deficit from the fuel subsidy, forcing it to seriously consider speeding up plans to increase domestic fuel prices.

The central bank, meanwhile, continued its all-out market intervention on Wednesday to curb the rupiah's decline.

Bank Indonesia (BI) raised its one-week overnight deposit rate for banks by 0.25 percent to 7.5 percent to absorb excess liquidity and to stem the rupiah's fall.

Speaking after the meeting with BI, Susilo said the government should reduce the deficit for the sake of fiscal sustainability but without creating a negative impact on people of the low income bracket.

"We are working to reach the balance," he said.

He also called on speculators not to take advantage of the situation.

Susilo was upbeat that his administration would be able to defend the rupiah to the level set in the 2006 state budget draft of Rp 9,400 a dollar.

"It is really complex, but we are sure that we can stick together to improve the situation," the President said.