IMF unlikely to say yes to fixed rate plan for RI

IMF unlikely to say yes to fixed rate plan for RI

SINGAPORE (AFP): The IMF is very unlikely to accept a proposal by a popular Indonesian opposition party for a fixed exchange rate system, analysts said Friday.

The Indonesian Democratic Party of Struggle (PDI Perjuangan), led by popular Megawati Soekarnoputri, was reported as saying it wanted to launch the fixed exchange rate system to protect the industrial sector if it wins the June 7 polls.

"The market doesn't think this will become a reality so long as the IMF is in Indonesia. Anyway, it could be some time before the IMF leaves Indonesia," said Sani Hamid, emerging market analyst with Standard and Poor's MMS.

Indonesia's recovery hinged heavily on financial funding by the International Monetary Fund (IMF), which led a global bailout of the huge economy following the collapse of the rupiah in 1997, Sani said.

The rupiah was traded under a managed float system before the currency sank during foreign exchange turmoil in the region which erupted in mid-1997. Prior to the managed float system, the rupiah was traded at a fixed rate.

The PDI Perjuangan, in comments reported Thursday, said it would first seek approval from the IMF over its proposed fixed exchange rate system.

Christy Tan, analyst with financial consultancy IDEAglobal.com, said the proposal had been ruled out by the market as a viable alternative.

The IMF had previously shot down a Hong Kong-like Currency Board system proposed by President Soeharto before he fell from power, she said.

There was little impact on the rupiah Friday from the PDI Perjuangan proposal. It was a shade lower at 8,110 against the dollar from Thursday's close of 8,100.

Kate O'Donoghue, analyst with Barclays Capital, said the PDI Perjuangan proposal was a "source of concern and justify an uptick in risk premiums" because the fixed exchange rate system would be at odds with IMF policy and put its whole program in Indonesia at risk.

Under the IMF's tutelage, the central Bank Indonesia has striven to preserve the value of the rupiah and soften inflationary pressures.

"Given Indonesia's limited foreign exchange reserves, calls for a fixed exchange rate will always give rise to fears of imposition of capital controls," O'Donoghue said.

Sani of MMS said that the "best case scenario" for capital controls in Indonesia as part of a compromise by the IMF would be an adoption of the Chilean model.

Under that model, a portion of capital flowing into the country would be entered into a non-interest bearing account in the central bank which basically made it costly for investors who pulled out investments within a short span of time, he said.

O'Donoghue of Barclays said that until now, the importance of the Indonesian polls was seen chiefly in terms of producing a government with legitimate popular support, and a mandate to forge ahead with the current successful IMF-led policy mix.

"However, as the campaign progresses the rhetoric from some of the parties suggests a breakdown of this consensus," she warned.