Neiss foresees stronger rupiah, lower rates

Neiss foresees stronger rupiah, lower rates

SINGAPORE (Dow Jones): Despite recent gains on foreign exchange markets, the Indonesian rupiah still has room to strengthen and domestic interest rates could fall further, Hubert Neiss, Asia Pacific director for the International Monetary Fund, said Wednesday.

"If things go well, that is most likely to happen," Neiss said of further rupiah strengths, "But probably the rupiah will not appreciate to the same extent that the currencies of the other crisis countries have appreciated."

Neiss declined to suggest how much further the rupiah could strengthen on foreign exchange markets.

"The less said about the exchange rate, the better," he said, adding that quoting a specific level "would just confuse the markets."

Neiss shrugged off a suggestion from the audience that the rupiah's strength has gone beyond what the market would normally dictate.

"The appreciation of the rupiah wasn't the result of any manipulation. It was the result of a return to confidence."

Neiss said that the priority for Indonesia as it chooses its next president should be to continue the economic recovery program in order to give the next government a firm base to set midterm policies.

This could include a further reduction in interest rates and continued reforms in the banking and corporate sectors.

In response to another question from the audience, the IMF director said there may be a time for Indonesia to consider fixing its foreign exchange rate, but that time is not now.

"I would personally do everything possible to persuade the next government that that measure at this stage is too risky," he said. "If you start to fix the exchange rate tomorrow, you may fix it at the wrong level."

This would lead to either massive intervention, which would deplete foreign reserves, or a sharp increase in interest rates, which could stall the recovery.

Neiss also said that there shouldn't be any concerns that current foreign exchange rates are hurting Indonesian exporters.

"All estimates that are being made by Indonesian experts and by ourselves point to the conclusion that exports at this point are not hurt," he said.

The IMF director - speaking Wednesday at a Singapore seminar on the Indonesia's June 7 parliamentary election - said the Indonesian government's monetary, fiscal and foreign exchange policies must continue to be carefully managed, to coax the economy back to health.

"The government must balance growth with stability, moving gradually from an expansionary to neutral stance as recovery occurs," he said, adding that timing is crucial to any revision in fiscal policy. "Too early and it could undermine recovery; too long and it could trigger inflation."

Neiss cautioned that Indonesia's political process, which will culminate in the democratic election of a new president this November, is also vital for recovery. "Otherwise, market confidence will falter, undermining a recovery and we will have to start all over again."

Neiss added that the government must be careful to protect itself against the rising cost of restructuring banks, which, according to the latest estimates, could be more than 50 percent of gross domestic product.

"Bank restructuring costs should be offset by loan recovery or the sale of non-performing loans. In addition, from the point of view of fairness, part of the burden should be placed with the beneficiaries of the original loans," he said. "Privatization of state entities should also...eliminate the drain of budgetary losses in the future."

As the economy recovers, he said the government should give some measure of fiscal autonomy to the provinces with the proviso that tax and revenue-sharing are part and parcel of any deal.

The government should also push hard to dismantle monopolies, tax holidays and guaranteed credit or trade for certain industries to encourage a level playing field for small, medium and large businesses. He said this - along with well-implemented legal reforms - would increase competition and decentralize company ownership so that the country would be less vulnerable to financial crises in the future.