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)