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.