Hanke says stable rupiah key to stability in Indonesia

Hanke says stable rupiah key to stability in Indonesia

SINGAPORE (Dow Jones): Johns Hopkins University economist Steve Hanke warned yesterday that without stabilization of the rupiah, Indonesia could expect continued political turmoil and a greater trend toward use of the U.S. dollar in the economy, which he said is taking hold throughout the region.

Speaking on CNBC Asia from Baltimore, the former adviser to past Indonesian president Soeharto said the situation in Indonesia had "deteriorated significantly" since the government decided against implementing the currency board system he recommended in February. He said Indonesia was now in a "revolutionary" environment.

"They have to stabilize the rupiah. Otherwise, the Habibie government will meet the same fate as the Soeharto government," he said.

Hanke said he was unimpressed with the International Monetary Fund's current agreement with the Indonesian government, its fourth, because it doesn't take decisive steps to lift the value of the country's battered currency.

"The whole region... is slowly starting to dollarize," he added, "as Latin America did in the 1980s." He indicated that the phenomenon showed no popular confidence in regional currency policies. "People are doing it on their own, voting with their pocketbooks," he said. "Currencies will remain weak as dollarization increases."