Rupiah's plunge 'does not reflect' economic basics

JAKARTA (JP): Coordinating Minister of Economy, Finance and Industry Kwik Kian Gie said here on Wednesday that the rupiah's dramatic drop over the last two days did not reflect the company's economic fundamentals.

"I just would like to reaffirm that it (the rupiah's weakening) is not related to Indonesia's economic soundness," he said after a Cabinet meeting,

The macroeconomic and monetary conditions of Indonesia are good and have been improving continuously, despite some disturbance on the political front, Kwik said.

The rupiah dropped again on Wednesday to end the day at Rp 9,385 against the U.S. dollar, its lowest level since March last year. It has lost about 7.5 percent of its value over the past five days.

Kwik warned that those who had bought dollars might get burned because the Indonesian currency could rebound to its level of Rp 7,000 after the annual meeting of the People's Consultative Assembly (MPR) in August.

"So, for those who have bought dollars: be careful. Because (just as the) rupiah once recovered from 16,000 (per dollar) to 7,000, it could happen again," he said.

Foreign exchange dealers said that the rupiah's dive was triggered by panic selling on fears of a possible worsening of political conditions ahead of the Assembly's meeting.

These negative sentiments were compounded by a bomb blast at the Attorney General's Office late on Tuesday, following the questioning of the youngest son of former president Soeharto Hutomo Mandala Putra in a corruption case.

The currency dealers said the weakening of the rupiah was strictly on account of the country's politics.

Agreeing with them, former minister of finance Mar'ie Muhammad said in Yogyakarta on Wednesday the drop of the rupiah against the greenback was due mainly to political factors.

"The rupiah's fall is caused by nontechnical factors such as the plan by the House of Representatives to use its interpellation right against President Abdurrahman Wahid," he said, referring to the House's intention to summon the President for questioning later this month.

Mari'e said that the interpellation had been wrongly understood by the market as a signal that the President had lost his political support.

While the interpellation itself is not politically risky for the President, political analysts fear that any objection by the House to the President's explanations could be brought to the MPR's annual meeting.

Unlike the House, the MPR has the right to impeach the President.

Meanwhile, Bank Indonesia deputy governor Miranda Goeltom said later on Wednesday that the central bank would not rule out intervention to support the rupiah, although she doubted the effectiveness of such a measure amid the current political uncertainty.

Miranda also said the weakening of the rupiah was largely caused by political uncertainty, especially in the run-up to the August special session of the People's Consultative Assembly (MPR).

She said that the political uncertainty had increased Indonesia's sovereignty risk, as was reflected in the higher yield spread of the government Yankee bonds issued in 1996 and maturing in 2006.

"Our sovereignty risk is very bad, and every time the country risk increase, the yield spread (of the bonds) also increase," she said.

Miranda pointed out that the yield spread was now around 700 basis points above the Libor (London interbank offering rate), from around 600 last month and 110 in 1996.

Miranda said that Indonesia's economic risk was not bad, but added that the only concern was that the current economic growth was largely driven by consumption and government spending and not investment, something which in the long term was not sustainable. (udi/rei/44)