Rupiah falls to lowest level in two years

JAKARTA (JP): The rupiah dropped on Monday by 2 percent to its lowest level since October 1998 amid worsening ethnic violence in Central Kalimantan and problems with the International Monetary Fund.

The rupiah ended at Rp 9,830 per U.S. dollar late on Monday from Rp 9,685 on Friday, foreign exchange dealers said.

Bank Indonesia senior deputy governor Anwar Nasution pledged that the central bank would intervene in the market to help prevent the local unit from exceeding the Rp 10,000 level.

"We will continue to intervene in the market but we should also address the main problems, the unrest and political problems," Anwar was quoted as saying by Reuters. "Of course we hope we can stabilize the rupiah below 10,000."

Around 270 people have been killed in ethnic violence in Sampit, Central Kalimantan. The week-long violence has added jitters to a financial market already edgy by reports of worsening relations between Indonesia and the IMF.

Dealers said that the drop in the local currency was also driven by strong corporate demand on dollars to repay overseas debt.

Dow Jones news wires quoted dealers as saying that genuine corporate demand early in the day emerged around Rp 9,725 to Rp 9,775, prompting other participants to cover their short dollar positions. This triggered stop-loss dollar buying around Rp 9,800, which pushed the dollar to as high as Rp 9,865, they added.

The rupiah had dropped to as low as Rp 9,865 earlier on Monday, but found temporary respite when state banks sold dollars, probably on behalf of the central bank, and as commercial banks locked in profits, dealers said.

Dealers also said that the market was nervously awaiting for the result of last week's high-level talks between Coordinating Minister for the Economy Rizal Ramli and the IMF in Washington.

Relations between the government and the IMF had dropped to its lowest level after the Fund delayed the disbursement of its next US$400 million loan installment to Indonesia. The delay was made due to concerns over several issues including the government-proposed amendment to the central bank law, a poorly- designed fiscal decentralization policy, and delay in the sale of government ownership in Bank Central Asia and Bank Niaga.

The disbursement of the IMF money is seen as a key factor to help maintain investor confidence in the economy, and to open the way for other multilateral donors to provide their assistance to Indonesia.

Rizal said in a press conference late on Monday that the government and the IMF had reached an "agreement" over the difficult issue of the central bank law amendment, paving the way for the Fund to proceed with the review of the country's economic reform program and the disbursement of its loan.

The rupiah had been relatively steady in the past month despite increasing political uncertainty triggered by the legislature's censure of President Abdurrahman Wahid over alleged involvement in two financial scandals. The censure could lead to a process of impeachment.

The new foreign exchange ruling introduced by Bank Indonesia in the middle of January helped to maintain the stability of the local currency.

The new forex ruling basically bans rupiah transfers to nonresidents and cuts down the limit of forward transactions between onshore banks and nonresidents from Rp 5 million to Rp 3 million in a bid to help curb speculation against the rupiah.

But experts said that the restrictions had only served to slow down the rupiah's descent - and not halt it - as onshore dollar demand remains strong, and domestic economic and political problems persisted. (rei)