Rupiah's fall has not hurt economy, says central bank

Rupiah's fall has not hurt economy, says central bank

Dadan Wijaksana, Jakarta

Bank Indonesia said the recent sharp drop in the value of the
rupiah against the U.S. dollar had not yet caused a significant
negative impact on the local economy.

The central bank said it was optimistic the economy would grow
faster at 5 percent this year on continuing strong domestic
consumption.

"On the macroeconomic side, the weakening of the rupiah in May
2004 has not yet had a significantly negative impact on the
domestic economy," the central bank said in a statement after its
board of governors monthly meeting late on Tuesday.

The rupiah has been weakening during the past month, falling
to a 26-month low at one point, and is seen as the worst-
performing currency in the Asia region.

Bank Indonesia said that the average closing rate of the
rupiah during May was Rp 9,028 per dollar, or 4.8 percent lower
than the previous month's average.

There have been worries that the weakening of the local
currency would create strong inflationary pressures, which in
turn would weaken consumer purchasing power and thus affect
domestic consumption and economic growth.

Domestic consumption accounts for about 75 percent of gross
domestic product (GDP).

However, while admitting that inflation could slightly exceed
the initial forecast of 6.5 percent, Bank Indonesia said this
would have only a small impact on the overall economy.

The central bank expected second-quarter economic growth would
be faster than its initial prediction of 4.3 percent to 4.8
percent.

"The prediction was based on increasing public expectations of
good economic prospects, as indicated by various surveys
conducted by Bank Indonesia and other agencies up to April," the
central bank said.

"In the meantime, rising confidence from the business sector
has had a positive impact on investment, and exports have grown,
albeit at a relatively limited pace."

The state budget targets economic growth at 4.8 percent this
year. It grew last year by 4.5 percent, the fastest since 2000.

Indonesia's economy will need to expand at a robust pace of at
least 6 percent to be able to absorb fully some 2.5 million new
workers annually, and part of the nation's open unemployment,
which stands at 10 percent. (wording changed slightly here)

The statement also attributed the rupiah's slide mostly to
external factors including an imminent U.S. rate hike, a slowdown
in China's economy and soaring oil prices -- which then had a
negative impact on the economy.

"From the domestic side there was an increase in (dollar)
demand from corporations for import and debt repayment financing,
apart from speculation (against the rupiah)," it said.

Bank Indonesia has introduced measures to help reduce
speculative dollar purchases, such as raising the minimum reserve
requirement of banks and wider use of financial instruments --
including the sale of new, six-month bills.

It has also created a seven-day "intervention rate", which
allows the central bank to borrow rupiah from banks at a 7
percent interest rate.

The minimum reserve requirement will also be raised starting
July 1 to between 6 percent and 8 percent from the current 5
percent, depending on the amount of a bank's deposits and
savings.