Rupiah's rebound will take time: BI governor

Rupiah's rebound will take time: BI governor

CHIANG MAI, Thailand (Dow Jones): Bank Indonesia Governor Sjahril Sabirin on Monday called on the government to better explain why two cabinet ministers were dismissed last month.

In an interview with Dow Jones Newswires, he said the key factor weighing on the rupiah was the government's late-April dismissal of the trade and investment ministers, rather than expectations that the U.S. will raise interest rates.

"It will take some time" before the market can "get rid of all the questions" raised by the summary dismissals.

"I think what is needed is more explanation about why the two ministers were removed," he said.

"Certainly, the current (exchange) rate is too weak for the rupiah right now," he said, predicting that once the political problem is addressed "the rupiah should strengthen to 7000 (against the dollar) or stronger."

Indonesian rupiah ended lower Monday as local companies bought dollars to service maturing offshore debt, dealers said.

The dollar ended at Rp 8,023, up from Rp 7,980 late Friday in Asia.

After having stayed below Rp 8,000 for most of the trading session, the U.S. unit surged to above that psychologically important level on late afternoon bids by a local company.

Dealers said that the company, a subsidiary of the Sinar Mas Group, bought between $35 million and $40 million.

The central banker noted that President Abdurrahman Wahid has already moved to quash financial market worries that other ministers would also go, such as the finance or economy ministers.

Sjahril said his own relationship with the president has improved, and he has recently attended two cabinet meetings related to the economy. Early in Wahid's term last year, the president was putting pressure on Sjahril to step down. "I think it is quiet now," Sjahril said.

The central banker speculated, however, that Wahid may have turned down the heat only because the central bank governor legally can't face political dismissal. "Perhaps what happened is he didn't really realize there is a new central bank law," Sjahril said.

Nevertheless, the central bank governor added that he doesn't understand why there was pressure in the first place. "I don't think there was any question about the performance," he said.

The Indonesian central bank governor said market expectations for a U.S. interest rate hike of as much as 0.5 percentage point aren't particularly worrying.

"I don't believe it has had any impact on the rupiah because I think the interest rate margin is enough to absorb that," he said. Sjahril noted the one-month Indonesian interbank market rate is around 11 percent.

At the same time, he said Indonesia's high interest rates are no longer drawing capital as they once did. "The flow of capital in response to the interest rate differential has already taken place. Longer-term flows will very much depend on the overall confidence in the economy," he said.

April inflation figures were better than expected, he said, adding that his focus on monetary aggregates suggests that core inflation can be contained at 3.0 percent to 5.0 perent, is "still attainable."

Consumer price inflation, however, could be lifted by 2.0 percentage points after government decisions to raise official salaries, some fuel prices and electricity charges.

Sjahril said that he has no information on currency swap arrangements to be structured among Asian countries, following a weekend decision to improve regional cooperation among the 10 Association of Southeast Asian nations, Japan, China and South Korea.

In fact, he acknowledged that one major difficulty in the agreement is that it was formulated by finance ministers but is to be implemented by Asian central banks, which are increasingly getting independence from governments.

He was speaking on the sidelines of the Asian Development Bank annual meeting, where the swap arrangement was announced.