Peg useless without political change

Indonesia is gearing up to establish a currency board system aimed at stabilizing the beleaguered rupiah. This would mean pegging the Indonesian rupiah to the United States dollar. Sounds familiar? It should. Financial experts here generally agree that our own currency's link to the U.S. dollar has served Hong Kong well and has underpinned confidence and stability here. While arrangements have yet to be finalized, analysts expect the rupiah will be set at 5,000 to the U.S. dollar, should the proposal go ahead.

News that Indonesia might seek to align its currency in this way came as no surprise. Recent comments by President Soeharto about the need to stop currency speculation had already raised expectations of financial reforms. The question is: would this move help stabilize the rupiah? Unfortunately, there is still some reason to doubt whether it would. The trouble is that the situation in Indonesia is no longer an economic or financial crisis, but a political one. Whether the currency link works or not will depend on whether the Indonesian people and the investors have confidence in the rupiah. It is as simple as that.

-- The Hong Kong Standard