Rupiah expected to strengthen soon

JAKARTA (JP): Coordinating Minister for Economy, Finance and Industry Ginandjar Kartasasmita predicted on Wednesday that the rupiah would get stronger after next week's general election.

He said that both the local currency and the economy would further gain strength with progress in the bank recapitalization program and corporate debt restructuring.

"After the election, with political certainty, I think it (the rupiah) will strengthen," he told reporters ahead of a cabinet meeting.

"God willing, the economy will recover by itself if all the economic programs including bank recapitalization and corporate debt restructuring are implemented," he added.

Indonesia is set to hold its first multiparty general election on June 7 after more than 30 years under the authoritarian rule of former president Soeharto.

The election campaigning activities which started on May 19 will end on Friday. The campaigning has so far been relatively non-violent despite the bloody rioting that took place in several parts of the country.

But the rupiah closed slightly lower at Rp 8,150 on Wednesday against the U.S. dollar from Tuesday's close of Rp 8,100 amid fears of possible violence in the final days of the election campaign.

The Indonesia Democratic Party of Struggle (PDI Perjuangan) is set to hold its final campaign today in Jakarta and its massive number of supporters are expected to parade all through the main streets of Jakarta, causing long traffic jams.

The ruling Golkar Party is scheduled to hold its final campaign in Jakarta on Friday.

Ginandjar said that for the time being the acceptable level of the currency was at Rp 8,000 to the dollar.

"For now, the market values the rupiah at around this level and the government is happy with that," he said.

Ginandjar said that the campaign had not caused a negative impact on the economy as the electioneering activities turned out to be non-violent.

He pointed out the positive development in key economic indicators such as inflation, interest rates and the rupiah.

Inflation in May was negative 0.28 percent, which was the country's third month in a row of deflation.

Bank Indonesia Governor Sjahril Sabirin expected on Tuesday that inflation this year should be in the range of 10 to 13 percent.

The low inflation expectation and the relatively stable rupiah has provided the central bank with room to allow domestic interest rates to decline during the past few months.

Sjahril said that Bank Indonesia targeted its benchmark interest rate to go down to the 20 percent level by the end of this year.

The average interest rate of a Bank Indonesia one-month SBI promissory note fell to 24.65 percent at Wednesday's auction, compared to 26.12 percent last week.

Some analysts, however, warned Bank Indonesia that a further decline in the interest rate would be detrimental to the rupiah because of the anticipated remaining political and economic uncertainty.

"An interest rate of 26.12 percent is already near the parity level. And if you continue to push down the rate, the rupiah will weaken," said a market analyst.

He said that the country's political landscape would remain unclear over the next several months ahead of the presidential election in November.

He added that questions on how the government would secure financing for its costly bank recapitalization program without causing a budgetary strain, and how the government could push bad debtors of domestic banks to repay their nonperforming loans were among the remaining economic uncertainties.

The Indonesian Bank Restructuring Agency and several domestic banks announced on Tuesday their list of debtors in a bid to push them into debt restructuring talks.

The bad debtors, particularly at the seven state banks, are mostly well-connected businessmen who had been reluctant to agree to a restructuring agreement because of a strong possibility that they would have to give up a large slice of their businesses to repay their debts.

The analyst said the rupiah could weaken because more local corporations would have to purchase dollars following their foreign debt restructuring agreements with creditors.

"Debt restructuring also means debt repayment," he added. (rei/prb)