Rupiah weakness is 'incomprehensible': Kwik

JAKARTA (JP): Coordinating Minister for the Economy, Finance and Industry Kwik Kian Gie said on Monday that the current weakness of the rupiah was "incomprehensible" because it contradicted the improvement in the country's macroeconomic indicators.

"Based on the development in macroeconomic indicators, the drop in the exchange rate of the rupiah is incomprehensible," Kwik told a media conference following a meeting with senior economic ministers.

"So our conclusion is that the weakness in the rupiah is caused by psychological factors," he added.

Kwik said the economy had continued to grow in the first quarter of this year, and positive developments were also seen in the manufacturing sector, consumption, investments and exports.

But Kwik added that the free-floating exchange rate system adopted by the country since late 1997 had contributed to the fluctuating rupiah.

He urged people not to be surprised by sharp increases or drops in the value of the rupiah because the free-floating system allowed the market to fully dictate the currency's exchange rate.

Kwik also admitted that domestic political uncertainty had contributed to the rupiah's weakness.

But he said that he had been informed by the head of the national intelligence agency (Bakin) that despite the continuing political and security "disturbances", things were still under control.

The rupiah has been under pressure over the past month. The local currency closed at Rp 8,608 per U.S. dollar on Monday, much lower than the government target of Rp 7,000 per dollar for this year.

Separately, Bank Indonesia Governor Sjahril Sabirin said on Monday that the central bank would continue to intervene to prop up the rupiah.

He said that intervention would include measures to raise the interest rates of central bank SBI promissory notes.

"We are going to intervene in the market," Sjahril said before meeting with the House of Representatives commission IX for financial and development planning affairs.

Interest rates

Meanwhile, Bank Indonesia deputy governor Miranda Goeltom expected SBI note interest rates to increase at Wednesday's auctions by "one or two basis points".

Miranda said that if the domestic political situation continued to haunt the rupiah, the trend for SBI note interest rates to increase would inevitably continue.

Miranda said that the rate had increased by some 37.5 basis points over the past month.

"This is a monetary reaction of the central bank to the current (political) situation," she told reporters on the sidelines of a hearing session with the House.

The interest rate on one-month SBI notes rose to 11.3 percent last Wednesday compared to 11.07 percent earlier.

Miranda also said that the increases in SBI notes interest rates were not necessarily a reaction to U.S. Federal Reserves interest rate increases.

She explained that Bank Indonesia believed that domestic interest rates did not necessarily follow U.S. rates if political developments at home were positive.

"Our interest rates our already the highest in the region," she said.

Miranda said that the development in the exchange rate of the rupiah was basically influenced by economic risks, financial risks and country risks.

She said that in terms of economic risks, there were more upsides than downsides because of the positive macroeconomic developments.

"The only thing is the investment problem, which has not shown encouraging signs. I think this is due to political developments," she said.

She said that in terms of financial risks, the country has nearly completed its bank recapitalization program.

But the problem was that the necessary environment for the banking sector to fully perform its intermediary function was not yet there, she said.

She added that the biggest problem was Indonesia's country risk, which was directly influenced by developments on the political front.

"So this boils down to one thing, which is the political factor," she said.

Miranda said that the country's free-floating exchange rate system should not be blamed for the weakening of the rupiah.

She pointed out that other currencies, including the US dollar, German mark and South Korean won, which implemented a free-floating exchange rate system were relatively stable.

"The important thing is how to eliminate the three kinds of risks, particularly the political problem," she said.

"And it is also important that the government continues with its economic reform program," she added.

Asked if higher domestic interest rates would threaten the country's bank restructuring program as well as the overall economic recovery, Miranda said that it was possible.

"But we'll try to minimize the impact. We're not expecting interest rates to increase significantly," she said. (rei)