Politics will still affect rupiah: BI

JAKARTA (JP): Bank Indonesia Governor Sjahril Sabirin said on Tuesday the rupiah's exchange rate to the U.S. dollar next year would be influenced more by market sentiment on domestic social and political conditions rather than economic fundamentals.

"The market sentiment on domestic social and political conditions, rather than economic fundamentals, will be the biggest determinant of the rupiah's rate," he told House of Representatives Commission IX for financial and development planning affairs at a hearing.

"We will closely monitor this condition for designing our monetary policy," Sjahril added.

He estimated that Indonesia would continue to experience social and political dynamics next year amid a strong demand for broader autonomy from the provinces.

The rupiah has been negatively affected by the political turmoil in the restive province of Aceh during the past couple of weeks.

An increasing number of Acehnese have been demanding a referendum for independence, which was recently rejected by President Abdurrahman Wahid.

Most analysts fear that if the oil and gas rich province of Aceh separated from Indonesia, it could trigger the country's disintegration.

The government is still finalizing rules to implement the new laws on regional administration and intergovernmental fiscal balances which will grant more power and a bigger share of natural resource-generated revenues to local administrations.

The rupiah closed on Tuesday at Rp 7,300 to the U.S. dollar from Rp 7,075 previously.

The local currency managed to strengthen to below the Rp 7,000 level following positive developments in the economy recently, but weakened again to above Rp 7,000 partly due to the negative development in Aceh.

On the economic front, Sjahril expressed optimism.

"We foresee that the overall real Gross Domestic Product (GDP) growth for the year will be about zero percent," he said.

The central bank predicted that the GDP growth this year would be between minus one percent and zero percent, compared to a contraction of more than 13 percent last year.

Sjahril projected inflation for the whole year to be between 2 and 3 percent.

Separately, Bank Indonesia deputy governor Miranda Goeltom said that inflation in November would increase again slightly to 0.5 percent due to higher prices of several commodities.

"I don't think there will be deflation for the rest of the year," she told reporters on the sidelines of the hearing.

The economy posted deflation from March to September this year after it suffered hyperinflation of more than 77 percent last year.

But a 0.06 percent inflation occurred in October, sending the annualized inflation rate to 1.58 percent.

Sjahril projected that the central bank benchmark interest rate would fall further to about 12 percent by the end of this year.

The interest rate on Bank Indonesia one-month SBI promissory notes is currently hovering at about 13 percent.

The benchmark interest rate shot to as high as 70 percent last year when the economic crisis deepened.

Bank Indonesia deputy governor Subarjo Joyosumarto said that despite the improving macroeconomic condition, state banks were still "bleeding" as their operational income was smaller than their operational cost.

"Although interest rates have come down, banks are still unable to resume significant lending because the real sector remains largely in the doldrums and the economy has yet to fully recover."

Subarjo said that the government should speed up the recapitalization of state banks, otherwise their condition would worsen.

"But the overall picture (of the state banks) is not yet too worrisome," he said, responding to questions from journalists.

He pointed out that the banks were still able to comply with the 5 percent minimum reserves requirement.(rei)