Rupiah seen to remain attractive

Rupiah seen to remain attractive

JAKARTA (JP): Bank Indonesia's Governor J. Soedradjad
Djiwandono said yesterday the government would continue to
depreciate the rupiah against the U.S. dollar to a level which
could boost Indonesia's export performance.

But the depreciation would also be at a level which
accommodated the public's understanding that a strong rupiah was
needed, he said.

"For the national interest, a balance between the two will
always be needed," he said after speaking at a conference held by
ABN-Amro bank on the European single currency.

Soedradjad said that despite the public's understanding, the
best indicator of a currency's strength was the inflation rate.

"If inflation is high, it means the rupiah's purchasing power
is weak," he said. So it was most important to keep inflation
low, he said.

"If inflation is controlled -- meaning that prices are stable
-- then the rupiah will be favorable to the public," he said.

The rupiah's value was closely linked to the dollar, he said.

"But if the equilibrium between the rupiah and dollar is
sometimes disrupted, it doesn't mean everyone should be sad," he
said.

"You spend in rupiah and you are paid in rupiah. So the
indicator is really price levels," he said.

Soedradjad said that Bank Indonesia, the central bank, would
continue to support export activities. For this reason, it would
continue to depreciate the rupiah by 3 percent to 5 percent each
year, he said.

But he said the bank would also manage the rupiah in a manner
which reflected the market.

He said the funds which entered and left a country were not
always related to its export and import activities.

For Indonesia, funds entered because the country's economic
fundamentals were considered sound and interest rates were
attractive, he said.

"If lot of money comes in, then money supply goes up -- maybe
even exceeding demand. This makes depreciation a difficult task,"
he said.

For the sake of national interest, the rupiah would have to be
managed in such a way that exporters could continue to use the
incoming funds to conduct their activities, while the public
continued to feel "safe" with a strong rupiah, he said.

In fiscal 1996/97 (ended in March) when inflation in the
country was 5.17 percent, the rupiah depreciated by 3.35 percent
against the American dollar but appreciated by 12.60 percent
against the Japanese yen and by 10.02 percent against the German
mark.

Europe

Soedradjad told the conference the new currency would mean
more opportunities for Indonesia.

"The Euro market meets many of the criteria used by Indonesia
in its traditional approach to financial and capital markets:
pragmatism and prudence; borrowing when markets are favorable and
conditions attractive; and tapping the market when it offers
something of specific interest such as benchmarking or a true
diversification of sources of funds," he said.

And if Indonesia borrowed in the new market, it could opt to
keep some Euros to diversify its currency reserves and match its
liabilities, he said.

"Alternatively, it could swap the Euros into dollars," he
said.

He said that on the investment side, the Euro market could be
attractive to Indonesia as it offered a series of diversified
borrowers that had so far not tapped anything but a limited pool
of the largest investors.

"The development of a single market with a single currency
should lead us to consider the currency denomination of our
exports to the European market," he said, adding that the Euro
might become one of the main reserve currencies.

He said the Indonesian banking industry could be among the
first Indonesian users of the Euro market. "The ability to access
a new market with new products and new participants, on both the
asset and liability side of the industry, will be of considerable
benefit to our banking sector," he said.

Soedradjad said Indonesian imports and exports could also be
denominated in the Euro, which is due to be established on Jan.
1, 1999.

He said it was important to know what would happen to
Indonesia's existing debts denominated in currencies that would
be converted into the Euros, as well as the interest rate applied
and the legislation determining that these issues would be
formulated. (pwn)

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