Indonesia floats rupiah

Indonesia floats rupiah

JAKARTA (JP): Indonesia finally bowed yesterday to market
forces and floated the rupiah, abandoning its policy of
protecting the currency within a set trading band.

Minister of Finance Mar'ie Muhammad and Bank Indonesia (the
central bank) Governor J. Soedradjad Djiwandono announced the
float policy yesterday but said the central bank could still
intervene in the market when necessary.

Mar'ie said the decision to abolish the rupiah intervention
band was inspired by the experiences of neighboring countries,
especially Thailand, Malaysia, the Philippines and Singapore, in
defending their currencies against speculative attacks.

"They intervened in the market directly through spot squaring,
but still their currencies were not stable and even weakened.
Meanwhile, their reserves have been depleting. So, we learned
from this," Mar'ie told a news conference.

But he said the move was not taken because of pressure from
foreign governments or institutions.

The central bank also stopped yesterday publishing its
conversion rates of foreign currencies, coinciding with the
abolition of the intervention band.

"Indonesia is now the only one with the band. It's no longer
an advantage. And that's why we're abandoning the band,"
Soedradjad said.

The floating of rupiah was made effective from 9.00 a.m., when
the rupiah was traded at 2,645/2,650 against the U.S. dollar at
spot market.

Dealers said the rupiah immediately dropped to a new record
low of 2,760 to the dollar on the news and weakened further to
close at 2,810/2,815.

"I suspect the rupiah will continue to fall in coming days
because many speculators still hold dollars and want to sell them
at 2,900 or even 3,000 level," a local foreign exchange bank
dealer said.

The floating of the currency had also dampened the Jakarta
stock market. Stock prices fell 2.4 percent on concerns over the
impact of the float on corporate earnings and debts, stock
brokers said.

The Jakarta Stock Exchange composite index was down 15.593
points to 643.01 points, with total turnover of 381.12 million
shares worth Rp 554.23 billion (US$201.5 million).

Edwin Syahruzad of Pentasena Arthasentosa said companies had
to revise down their corporate earnings forecast this year due to
the weakening rupiah.

"The case now is no longer about macroeconomic fundamentals
but microeconomic problems," he said.

Soedradjad said it was normal for the rupiah to overshoot
following the government's decision to adopt a flexible exchange
rate policy.

Such an overshooting would be temporary and the rupiah would
eventually reach its new equilibrium, the governor said.

Mar'ie said the government would maintain the current tight
monetary and fiscal policies to help stabilize the currency.

After floating the currency, the monetary authority would now
focus on efforts to contain the domestic inflation rate, they
said.

While the float had been anticipated by many in the market,
the timing came as a surprise since the central bank raised
interest rates and intervened in the foreign exchange market
Wednesday to stop the rupiah from breaching the bottom of the now
defunct band.

"It's a surprising move. Almost nobody in the market was
prepared for this. We had expected that the central bank would
widen the band again," said one foreign exchange dealer.

Soedradjad disclosed yesterday that the central bank had spent
$1.5 billion on currency intervention since July 21, including
$500 million injected into the market Wednesday.

Soedradjad, however, said the move was realistic and that it
was not a surprise decision.

"We want to be realistic in assessing the situation. Looking
at the current situation, this appears to be the best decision,"
Soedradjad said.

"Of course these days people want to know precisely why they
want to take positions. We are really committed every time we
apply a system. Don't see this as a surprise," he said.

He argued that the central bank had several times widened the
now defunct intervention band from 0.5 percent at the end of 1993
to 12 percent late last month. The market, therefore, should have
anticipated the float.

Chairman of the Indonesian Chamber of Commerce and Industry,
Aburizal Bakrie, praised the decision and called on
businesspeople to be calm and not join the dollar-buying frenzy
to help stabilize the rupiah.

Analysts were also positive about the move and, given the
recent turmoil and period of economic and currency adjustment in
the region, said it made perfect sense to allow for more exchange
rate flexibility. (aly/rid)