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.