Rupiah's tumble due to economic uncertainty: WB

JAKARTA (JP): The World Bank's country director for Indonesia, Mark Baird, said on Thursday the weakening rupiah in recent days was mainly due to uncertainties over the future of the government's economic reform.

The impact of weakening regional currencies was also attributable to the rupiah's recent fall, Baird added.

"All regional currencies have been weak. In the case of the rupiah, there are uncertainties about the future of the economic program," Baird said on the sidelines of a seminar.

After falling to an intraday low of 8,440 against the U.S dollar, the rupiah on Thursday closed at 8,393 to the dollar, compared to 8,185 the previous day.

But Baird expected restored confidence in the rupiah would take place upon the signing of the letter of intent (LoI) with the International Monetary Fund (IMF) some time next month.

The LoI contains the outlines of the country's economic reform programs as agreed by the Indonesian government and IMF.

The signing of the LoI, slated for early June, will pave the way for the IMF's US$400 million next loan disbursement to the country.

Baird, however, admitted the disbursement of the IMF loan would not be the only driving factor in helping the besieged rupiah, saying that keeping the economic program on the right track and correcting the country's judicial system were more important.

A currency dealer at Bank Bali said the rupiah opened on Thursday at 8,170 to the dollar and kept falling to its intraday lowest of 8,440 at midday.

Some time after midday the rupiah's slide reversed slightly to strengthen at 8,350 after being bolstered by the strengthening of Singapore dollar and Thailand baht against the greenback following intervention by the respective countries' central banks, he said.

"In the local market we have not seen the (Indonesian) central bank intervening to support the rupiah as promised on Wednesday," the dealer added.

He said that besides the weakness of regional currencies, the rupiah's fall was fueled by comments made by Coordinating Minister for Economy, Finance and Industry Kwik Kian Gie which were received negatively by the market.

Kwik said Indonesia still faced too much instability to attract foreign investors.

"I never talk about foreign investment and things like that because I'm realistic enough; if I were a foreign investor, I wouldn't come to Indonesia," Kwik was quoted as saying by Dow Jones.

"The law enforcement is not there. But not only that, the whole thing is so confusing. How can you come here?" he added.

Kwik was also quoted by the newswire as saying that "the rupiah's weakness is not about the economy, it's because people don't believe in other things. Not only violence, not only anarchy, but also the stability of the government and the way the government is managed."

In a later statement to local reporters at Bina Graha presidential office, Kwik rectified the Dow Jones story, saying he never advised foreign investors not to invest in Indonesia.

"The reporter asked me why is it then that foreign investors have not yet come to Indonesia. I replied that I could understand if they wanted to wait and see, given the security situation that is not yet conducive," Kwik added.

He said foreign investors or business delegates he meets often ask about security problems being one of the main obstacles to new investment in the country.

But dealers said the newswire story on Kwik's comments had a negative impact on the currency market.

"Such a comment is like the go-ahead for the market to continue buying dollars," a dealer with a joint venture bank said.

Stewart D. Hall, an executive at the Standard Chartered Bank, said the rupiah, like all other currencies in the world, would most possibly be negatively impacted by the rising U.S. interest rates, which was slated for early next week.

"That (external factor) is one of many factors impacting the rupiah at the moment," he said here at a treasury seminar sponsored by the Standard Chartered Bank.

On the back of the continued strengthening of the economy, increasing personal borrowing and the overvaluing of stock market share prices, it has been widely speculated that the U.S. government would dramatically increase interest rates next week by 50 basis points.

Another executive at the bank, Steve Brice, hinted that in the coming few weeks the rupiah could weaken further but finally recover at the 6,000 to the dollar level by the end of the year.

"In our forecast, the dollar-to-rupiah exchange rate is to fall significantly below 7,000 -- to 6,400 -- by the end of the year," he said.

"On the strategic basis, the Indonesian rupiah is extremely undervalued now," Brice added.

Claudio Piron, another executive at the bank, dismissed the speculation that the Indonesian central bank would raise rupiah interest rates in response to the U.S. interest rate hike next week.

"Monetary policy should be conducted on a domestic basis and with the expressed aim to achieve price stability domestically," he said.

He said that as long as there was price stability, which the country's economy currently possessed, there was no need to increase interest rates. (udi)