Rupiah stabilizing
The rupiah market has remained calm over the past few days with its rate stabilizing at a range of 2,900-3,000 to the U.S. dollar. As the turbulence of the regional currency market is also tapering off it is reasonable to expect firmer stability within the next few months.
The reform package -- though its technical details are still being finalized -- has been improving market sentiment and has been effective in starting the process of regaining investor confidence.
The latest developments seem to have made the central bank much more confident about gradually easing the credit pinch, a move it promised last Wednesday when the government announced a new package of measures to cope with the currency turmoil.
The gradual easing of the tight monetary policy which started last Thursday was stepped up on Tuesday when the central bank again lowered its benchmark interest rates (Bank Indonesia Certificate rate) by between one and two percentage points. Though the rates are still high, ranging from 12.75 percent to 21 percent for papers of less than one month maturity and 23 percent for three-month and 25 percent for one-month papers, the direction is clear.
It is unreasonable to expect the monetary authorities to lower interest rates in a drastic manner as the market condition is still fragile and investors are still waiting for more concrete and detailed actions under the new reform package.
A Reuters poll of 12 analysts and foreign exchange dealers in Jakarta and Singapore early this week concluded that the rupiah rate would most likely move between 2,900 and 3,000 to the dollar until the end of this year.
Barring another wave of currency turbulence in other Southeast Asian countries, the 2,900-3,000 range predicted for the rupiah rate may hold firm. The sooner the rupiah settles at its equilibrium market rate, the better is for the economy as businesses will be able to start price adjustments based on that new market range. Likewise, the government needs a more reliable rate reference as it has to start preparing its 1998/1999 budget which has to be proposed to the House of Representatives in the first week of January.
Despite these encouraging developments, we cannot afford complacency and think that everything is now back to normal. We have still to complete our homework as investor confidence has not fully recovered.
The early process of regaining market confidence could be suddenly foiled if the government does not deliver what it promised in the Sept.3 reform package or if the final agenda of actions resulting from the package is seen as cosmetic.
The government is challenged to maintain the process of restoring market confidence, especially in the run-up to the Presidential election next March. It is not that political stability is in danger. Far from it, Soeharto's reelection has been ensured. But such a political agenda is usually full of rumors and is sometimes marred by conflicting signals to the market.
It is therefore most imperative for the cabinet to come out soon with the set of concrete measures set forth in the package and to refrain from giving confusing signals to the market while the final details of the reform measures are being prepared.