RI misses chance to cut inflation on dollar woes

RI misses chance to cut inflation on dollar woes

Urip Hudiono, The Jakarta Post/Jakarta

With a fuel price hike just around the corner and likely to
put pressure on inflation, monetary authorities should have let
the rupiah appreciate against the dollar to help release some of
that inflationary steam beforehand, analysts said.

Unfortunately, the local unit is still holding ground at
around Rp 9,000 per U.S. dollar, experiencing almost no
significant gains against the greenback, which recently has
dropped in value against major currencies due to concerns over
U.S. twin budget and current account deficits.

Besides attributing the situation to the still-high local
demand for dollars overwhelming its supply, economic observer
Goei Siauw Hong said that it also had to do with Bank Indonesia's
(BI) intention of keeping the rupiah at a stable rate.

"It then depends on whether BI's priority in doing so is to
keep inflation in check, or maintain the competitiveness of
Indonesian exporters," he said.

From what he saw, Goei said that it was possibly the latter,
as the central bank has not fully released the rupiah's exchange
rate to the market, and was even buying dollars from exporters.

"By doing so, it could very well have to issue more rupiah
bills, and therefore affect the inflation," he said.

"In my opinion, BI should have traded off more of the export
competitiveness for inflationary benefits, especially considering
the government's plan to raise fuel prices."

With a stronger rupiah, the price of imported goods can be
kept low, thus reducing inflation, which some say could threaten
the economy if the government proceeds with its plan to raise
fuel prices sometimes in the first quarter of next year.

On the other hand, it could well hurt exporters, as their
production costs in rupiah would rise relatively towards their
export revenue in dollars.

A stronger local currency in theory could also make Indonesian
export goods more expensive in the overseas market compared to
similar products coming from countries whose currencies do not
appreciate against the dollar.

Although Indonesian monetary officials have floated the
rupiah's exchange rate, it still keeps a tight eye over it, to
prevent speculators from wreaking havoc to its value as they did
during the 1997 financial crisis.

Economist Didik J. Rachbini however said that the current
rupiah exchange rate at around Rp 9,000 was already a win-win
solution for all.

"It's still high enough for exporters, and low enough for
importers," he said.

Meanwhile, concerning impacts of the weakening dollar towards
Indonesia' foreign currency reserves, Goei suggested that BI
diversify it from dollars to other currencies, such as the 12-
nation euro or the Japanese yen.

"This is to prevent a further decline of the reserve's value
if the dollar continues to drop," he said.

Bank Mandiri chief economist Martin Panggabean however said
that such a policy was not needed, as the composition of foreign
currencies in the reserves was already of a fair balance. Martin
declined to elaborate, saying the figures were confidential.

BI previously said that it would convert its dollar holdings
in the reserves -- which accounts to some 95 percent -- into
other currencies.

But Indonesia could well miss out on the trend, as tides start
to shift. Monetary officials in Europe, Japan, China, Taiwan and
South Korea are now considering market interventions to slow down
the dollar's plunge, to prevent it from hurting their exports.