Rupiah's plunge 'does not reflect' economic basics

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)