Market expects Hamzah to deliver on his promise

JAKARTA (JP): As the country enters its third week, effectively without a government, the rupiah's rise and fall hinges on whether Vice President Hamzah Haz can deliver on his promise to present a "market friendly" Cabinet this week.

Currency analyst Farial Anwar said the market was expecting President Megawati Soekarnoputri to heed its demand for a professional economic team.

Hamzah said last week that President Megawati would pay special attention to her economic team, which he said would have the respect of the market.

"Megawati had better not disappoint the market, once it loses confidence in her, she won't get it back easily," Farial told The Jakarta Post over the weekend.

Already the new president has tested the market's patience with the absence of a working Cabinet despite the pressure to bring the economy back on track.

Megawati was supposed to announce her Cabinet last Friday, but decided, for reasons still unknown, to postpone the announcement to next Thursday.

The decision frustrated the market, as signs of an intensifying struggle for key posts in the Cabinet became more apparent.

The rupiah fell slightly to 9,640 on the news as against 9,600 the previous day.

However, the stock index took the news badly causing it to plunge to 436.46 from 443.13 the day before.

Observers were divided over the impact of the delay in the Cabinet's announcement, with some claiming it was to ensure a stronger Cabinet, while others warning of political interests infesting key posts.

Despite the lingering uncertainties over the Cabinet, the rupiah ended higher last week at 9,500 compared to 10,000 the week before.

"We saw the rupiah strengthening although the government had not even begun its work, so don't lose this optimism," Farial said.

Dealers said Bank Indonesia might have lend a hand by intervening on Friday, to take advantage of the thin trading that day.

Bank Indonesia Governor Sjahril Sabirin said the central bank was ready to intervene if necessary. He also said the delay in forming the Cabinet would only have a temporary negative impact on the market.

"In the longer term, the market will realize that a stronger Cabinet was more desirable," he said.

Farial said the rupiah still had room for gains should the long wait for a Cabinet prove to be worthwhile.

"It's still possible to get to 9,000 on a good economic team," he predicted.

He said the market would then watch the International Monetary Fund (IMF)'s reaction to the new government.

"The IMF's response is a benchmark for the international market's confidence," he explained.

He said a positive signal from the IMF would be an immediate disbursement of the long delayed US$400 million loan tranche.

On the stock market, traders remained wary over President Megawati's seeming indecisiveness.

Stock analysts Dandossi Matram said the market had grown impatient over Megawati's failure to announce the Cabinet lineup on time.

He said even if Megawati presented a market friendly economic team, it could only bring about a minor boost to the stock index.

According to him, the market had already capitalized on Megawati forming a strong Cabinet when she was elected into office.

Should Megawati's Cabinet fall in line with market expectation, the index may rise to about 450, Dandossi estimated.

"The index will rebound to the market's earlier expectation when Megawati became president and everyone expected a stronger government," he said.

Megawati rose to the presidency on Monday, July 23. It pushed the index to 470, but it quickly slid to 450 on profit taking the following days.

Dandossi cited 450 as reflecting the market's real expectation of Megawati and her new Cabinet.

Last Friday, the Jakarta Stock Exchange (JSX) Composite Index ended the week's trading at 435.15 as against 447.39 the week before.

He added that a still gloomy economic outlook and sluggish regional market capped further growth.

Last week the Central Bureau of Statistics (BPS) issued a slew of disappointing data, citing year-on-year inflation for July at an alarming 13.4 percent.

Bank Indonesia's concerns over high inflation rates and a weak rupiah landed investors with discouraging high interest rates.

"But economy is not the main issue here as all economic indicators depend on political stability," Dandossi went on.

Megawati's priorities should be on political, security and legal certainties to allow the inflow of foreign investment, he said.

"Political certainty will stabilize the rupiah, lower banks interest rates and in turn encourage investment," he explained.(bkm)