Rupiah weakness is 'incomprehensible': Kwik

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)