Rupiah won't drop during MPR session: Economist

JAKARTA (JP): The rupiah is not likely to weaken much in the run up to the Aug. 7 through Aug. 18 People's Consultative Assembly (MPR) General Session as some have feared, according to an economist at a state bank.

Bank Mandiri chief economist Martin Panggabean said on Friday that the current weakening of the rupiah was only temporary as the country's economic fundamentals had improved.

He also said that the move by Bank Indonesia to curb speculation on the rupiah would also help limit the impact of political instability on the local currency.

"The pressure on the rupiah is only temporary ... and especially if Bank Indonesia succeeds in curbing speculation in the rupiah by foreign banks," he said at a seminar on the economy.

The rupiah ended higher in late trading on Friday at 8,945 per U.S. dollar, compared to 8,970 on Thursday.

The rupiah has been under strong pressure this month due to continuing political uncertainty ahead of the MPR session.

The local unit dropped to a 21-month low of Rp 9,570 per dollar earlier this month.

But sudden inspections by Bank Indonesia officials into bank dealing rooms to curb speculation has helped to prevent the rupiah from breaking through the Rp 10,000 level.

Bank Indonesia officials said that it made the inspections to ensure that the banks abided by the existing prudential rulings, including a prohibition for banks from surpassing the 20 percent daily net open position limit, and from opening forward contracts worth more than US$5 million with nonresidents.

Bank Indonesia acting governor Anwar Nasution also called on Singapore and other neighboring authorities on Thursday to help curb speculation on the rupiah.

Many have feared that the rupiah could drop even lower than the Rp 10,000 level due to the political uncertainty ahead and during the MPR session.

President Abdurrahman Wahid will give an account of his first 10 months in power at the session, which is expected to be tense as many fear that the lawmakers will use the meeting to impeach the President.

The MPR is the country's highest legislative body and has the right to unseat the President. But several senior politicians have said that there would be no impeachment against the President in the August session.

Approximately 68,000 police and military troops will be on full alert during the 12-day session to maintain security, particularly in Jakarta and the surrounding areas.

He said that based on the country's economic fundamentals, the rupiah should be stronger.

Martin forecast that the rupiah would strengthen to about 8,500 per dollar this year, and to beyond 8,000 next year, driven particularly by the country's stronger export revenue.

He said that world trading volume would continue to increase over the next couple of years, and commodity prices would also rise.

Martin dismissed suggestions that the current weakening of the rupiah was similar to what happened in 1997 and 1998 when the rupiah dropped to as low as 17,000 per dollar.

He said that although the country's foreign debt level remained a problem now, as it was in 1997, the economic fundamentals had now improved, including in terms of the current account surplus and the relatively low inflation.

He also said that in 1997, the rupiah was overvalued, while now people believed that the rupiah was undervalued.

"The rupiah is now undervalued, there's no way to rise further from the current level," he said.

Martin, however, admitted that the rupiah would remain volatile over the near term due to the remaining political instability.

He also said that the country's current foreign exchange system was the most liberal in the world, even so than the system in Singapore.

He said that this was one factor causing the rupiah to be easily speculated upon by overseas players.

He said that introducing a limited form of curbing overseas trading of the rupiah would also help in curbing speculation on the local unit. (rei)