Rupiah hits 10,000 on political concerns

JAKARTA (JP): The rupiah dived to its lowest level in 29 months to end Friday's trading at 10,090 against the U.S. dollar, on rising concerns over the country's ability to put a halt to the constant political bickering in Jakarta.

Trading at 9,930 to the U.S. dollar at the opening, the rupiah quickly lost ground and touched the 10,140 level, before closing at 10,090.

The rupiah's steep depreciation also dragged down share prices, with the Jakarta Stock Exchange (JSX) Composite Index closing 3.3 percent lower at 414.11.

Analysts and the government blamed politics as being behind the rupiah's breaching of the psychologically important 10,000 barrier.

Standard & Poor's move earlier to cut Indonesia's sovereign rating to negative from stable only added to the rupiah's woes, they said.

Currency analyst Pardi Kendi said concerns abounded that the conflict among the members of the political elite may now be having repercussions at the grass-roots level.

"The fear is that if the political disputes cannot be resolved, they will reach the grass-roots level, which would paralyze the country's economy," Pardi told The Jakarta Post.

But Coordinating Minister for the Economy Rizal Ramli played down the impact of the rupiah's fall, arguing that further depreciation would not hurt the public as food stocks were adequate.

"The situation now is much different from that in 1998 when the stocks of essential commodities were scarce and domestic demand had to be met with costly imports," Rizal told reporters.

But he expressed concern that political bickering among the elite might further push down the rupiah, adversely affecting the whole economy.

Market jitters are focusing on President Abdurrahman Wahid's future, as tension between him and his political opponents grows.

Wahid's position is becoming critical as his most vital ally, Vice President Megawati Soekarnoputri, gains support from his opponents to replace him should he be forced out of office before his term ends in 2004.

Pardi said this political uncertainty had stimulated rupiah speculation on the Singapore non-deliverable forward (NDF) market.

"The NDF market became active when bad news on political developments at home started to come out," he explained.

Singapore banks created the NDF market last month to circumvent a recent Bank Indonesia ruling that limits offshore speculation in the rupiah.

With the creation of a second market for the rupiah, the currency can be quoted at different levels. The NDF market quotes the rupiah lower against the dollar than the local market.

Pardi said that some traders had used the different quotes to arbitrage between the two markets.

"They (traders) buy the cheaper U.S dollars here to trade them for rupiah at a higher price in Singapore," he explained.

He said that as dollar demand for arbitrage transactions rose, the rupiah became weaker.

Companies with a real need for the greenback stepped in and scooped up dollars while they were still cheap, he added.

"Companies that had been waiting for the rupiah to strengthen then panicked and joined in (buying dollars)," he continued.

"The rupiah's weakening is a combination of demand for speculation and that of underlying corporate demand for transactions," he said.

Bank Indonesia governor Sjahril Sabirin blamed politics as well, but gave assurances that the rupiah was not on a free-fall course.

He dismissed worries that the rupiah would attain the same record levels as at the time when the economic crisis reached its peak in 1998.

In that year, the rupiah collapsed to as low as Rp 17,000 against the dollar as the country's economy spiraled to a near collapse and the political crisis heated up.

"The economic conditions in 1998 compared to now were very different," Sjahril argued, adding that at the moment the economy was much more resilient.

"We will continue to intervene as before," he added.

But Sjahril said the central bank would take no special measures to prevent the rupiah from falling further.

"The rupiah fell on account of non-economic factors; improvements in these factors will help it to strengthen," he said.

The interest rate on Bank Indonesia Certificates, the only other instrument useful for controlling the rupiah, would remain at present levels, Sjahril added.

Bank Indonesia was said to have spent $30 million to rein in the rupiah's fall this week, but Dow Jones, quoting traders, reported that the central bank had spent as much as $60 million on Friday alone. (bkm)