Ati Nurbaiti and Rendi Akhmad Witular, The Jakarta Post, Jakarta
Despite recently recovering from a slump, the rupiah is likely to remain volatile this year because most of the country's foreign exchange capital is still concentrated in a limited number of business groups, U.S. billionaire financier George Soros says.
The controversial philanthropist said the free-flow currency system adopted by Indonesia left it exposed to capital movement, with a few large business groups playing a dominant role in the fluctuation of the rupiah.
"Most of the capital (in Indonesia) is in the hands of limited business groups, which don't feel so secure here. Any slightest risk will cause them take their money to Singapore," said Soros in a recent interview with The Jakarta Post.
"The rupiah is always potentially unstable because, based on past experience, this capital is sensitive," he said, without identifying the business groups or suggesting the government peg its currency like Malaysia and China.
The rupiah has gradually strengthened over the past several weeks, closing at Rp 9,570 against the U.S. dollar on Friday, its highest level in almost seven months, after depreciating by more than 5 percent during the second semester of 2005.
While expressing optimism that the rupiah was now more stable, Soros cautioned the government to be very "sensitive" in addressing this issue and to maintain policies that will not cause capital flight.
"I think the currency is now stable. I don't think it will depreciate further. The most important thing is to reduce the fluctuations," he said, adding that he had no interest in speculating on the rupiah.
Soros said the responsibility for maintaining a stable currency belonged not only to the central bank, but also to the government, which should create a conducive business environment to attract long-term foreign investment in the real sector.
Vice President Jusuf Kalla said the only way to reduce the domination of the large business groups was to ensure the country's economy could be maintained and strengthened over the long term.
"The rupiah is volatile in nature, but the government cannot intervene in funds owned by the conglomerates. What we can do is to encourage long-term investment, such as in manufacturing, infrastructure and plantations," said Kalla.
Central bank governor Burhanuddin Abdullah recently suggested the recent strengthening of the rupiah was more the result of "hot money" flowing into short-term investment portfolios than long-term investment in the real sector.
According to a central bank report, investment in the government's promissory notes doubled to Rp 31 trillion (US$3.24 billion) in the first week of December, from Rp 15.2 trillion in July last year.
The source of the "hot money" is believed to be several local tycoons who do not feel secure parking their money or make any long-term investments here.
"I agree with Soros. Most of our capital is still owned by limited business groups ... whose abundant idle funds are often invested in the local bond and equity markets," said currency analyst Farial Anwar.
Large conglomerates have long acted as Indonesia's economic backbone, even after the 1997/1998 financial crisis. Although most of the tycoons moved their money out of the country in the wake of the crisis, most are still committed to maintaining their businesses here.
The volatility of the rupiah also depends on whether foreign exchange yields from exports, much of which are currently deposited in banks in Singapore, Hong Kong and Taiwan, are repatriated to local banks.
"The rupiah is not like the Thai baht and the Philippine peso, which can be forecast based on economic textbooks. This is because of the huge amount of funds parked overseas, which are often be used for short-term investments and speculation," said Farial.
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