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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