Rupiah falls, inflation may reach 8.8%

Rendi A. Witular, The Jakarta Post, Jakarta

The rupiah slumped to a three-year low on Monday following reports that full-year inflation could skyrocket to 8.8 percent, shaking an already nervous market and causing panic U.S. dollar buying in the corporate sector.

The rupiah fell to its lowest level since April 2002, closing at Rp 9,750 from Rp 9,670 on Thursday. The market was closed on Friday for a public holiday.

Stocks were also lower on Monday, with the Jakarta Composite Index dropping 2.7 percent, or 27.93 points, to close at 1,019.88.

The rupiah has weakened over the past several weeks to a three-year low following strong demand for dollars from local companies to pay their maturing debts and finance imports. Huge dollar demand from state oil and gas company Pertamina to finance oil imports has also helped weaken the rupiah.

According to data from the central bank, the average dollar- rupiah exchange rate was Rp 9,279 per dollar during the first quarter of the year, off from the government's assumption of Rp 8,900.

"To some extent, the weakening of the rupiah is not worrying since it has not fluctuated that sharply. This has given the business community some time to adjust. The impact has mostly been on inflation," said Bank Indonesia Governor Burhanuddin Abdullah at the State Palace on Monday.

With the continued slide of the rupiah and higher fuel prices, the central bank has hinted that full-year inflation could surpass initial projections.

Burhanuddin said inflation might be as high as 8.8 percent this year, easily surpassing the 2005 state budget's projection of 7 percent.

"A weaker currency has driven inflationary pressure amid the already high prices of goods due to the hike in fuel prices .... There is a possibility that inflation may rise to 8.8 percent this year," he said.

However, Burhanuddin backtracked on this forecast later in the day after his statement caused the rupiah and stocks to dive.

The Central Statistics Agency announced earlier this month that the general price increases in March -- due to higher fuel prices -- resulted in cumulative inflation in the first quarter of 3.19 percent, more than triple the 0.91 percent in the same period in 2004. Still, on a year-on-year basis, March inflation was 8.81 percent.

The government increased domestic fuel prices by an average of 29 percent in March, causing inflation to expand at its fastest rate since 2001.

High inflation will not only affect investment and business operations, it will also lead to weakening purchasing power.

Weaker consumer spending could eventually undermine the country's economic growth, which is estimated at 5.5 percent this year, with strong consumption expected to account for some 70 percent of gross domestic product (GDP).

Moreover, high inflation will also prompt banks to adjust upward their lending rates, making loans for the private sector more expensive.

Bank Indonesia raised on April 4 its interest rate to 7.53 percent from 7.44 percent -- a move aimed at easing inflationary pressure as well as defending the rupiah.

Burhanuddin said the central bank would meet with the government at the end of next month to discuss about the development in the macro-economic indicators, with a possibility for a revision.