Sjahril disappointed by rupiah

Sjahril disappointed by rupiah

BASEL (Dow Jones): Life has been hard recently for Indonesian
Central Bank Governor Sjahril Sabirin, and he doesn't see it
getting much easier in months to come.

Still, he does see some bright spots. Although preparing to
reduce his year-end target for the rupiah against the dollar and
expecting a significant drop in his country's gross domestic
product, Sjahril was at least optimistic that the political
upheaval in Indonesia was coming to an end.

In an interview with Dow Jones Newswires, Sjahril noted that
he had been disappointed by the lack of response in the rupiah
against the dollar after the recent completion of Indonesia's
US$80 billion private debt rollover deal.

"We thought the rupiah should have risen after the deal...but
market sentiment is sometimes hard to gauge," he said.

Asked whether he would now have to revise lower his year-end
target of 6,000 rupiah-to-the-dollar, Sjahril nodded in agreement
and said, "That may need to be changed, particularly when you
take into account the inflation rate."

Inflation in May in Indonesia came in at 5.4 percent on the
month, above the central bank's expectation.

The International Monetary Fund's exchange rate target under
its Indonesia program is also for Rp 6,000 to the dollar by the
end of the year, a figure most economists dismiss as wildly
optimistic. The rupiah has recently been trading around 11,525 to
the dollar.

Sjahril said he hoped that the market's opinion of the rupiah
would finally turn higher after next week's meeting in Jakarta
with IMF representatives.

"Some people may be waiting for the IMF to come up with the
next $1 billion," he said.

The IMF suspended disbursement in mid-May of its part of a $43
billion aid program to Indonesia. Sjahril said his goal was to
get a firm commitment next week on when the IMF board would meet
to approve new payments.

When asked if Indonesia could also look to the international
bond market to raise funds, Sjahril said no, at least in the
medium-term.

"For now I think we should depend on official aid," Sjahril
said. But he did leave a door open, saying that "if the market in
Indonesia improves significantly in coming months, then we could
go back to the bond market."

A key to regaining financial market confidence is political
stability.

"I believe that point has been reached...but some people may
be waiting for the date of elections to be known," Sjahril said.

B.J. Habibie, who replaced Soeharto as Indonesia's president
in mid-May, has promised to stage general elections as soon as
possible. Habibie said the poll would take place in May next year
after parliament overhauls rigid electoral laws from the Soeharto
era.

Sjahril said there may be some continuing protests, but
nothing approaching this spring's pandemonium.

"I'm not very worried about social unrest anymore....There
could be scattered demonstrations in Timor or Java, but I expect
no significant protests," he said.

But political calm will not be enough to stem Indonesia's
economic contraction, which continues to outstrip expectations.

Earlier this year, Sjahril had predicted Indonesia's GDP would
fall by 4 percent this year. While he wouldn't confirm Saturday
widespread talk of a 10 percent drop on the year, he did say that
the fall will certainly be greater than 4 percent.

A 10 percent drop "is one theory," he conceded.

On top of Indonesia's domestic problems, its economy is also
being hurt by Japan's economic malaise.

Japan is suffering from a lack of domestic consumer spending
and from banking sector problems which are likely to lead to a
fall in its GDP this year.

"Japan's problems do have some influence on Indonesia,
especially in terms of private sector financial flows," Sjahril
said.

He noted in particular that the weakness of Japan's economy
means that Indonesia receives less aid from Japan than might have
been expected. In addition, Indonesia's exports to Japan are
being hurt.

Turning to the draft law to make the Indonesian central bank
independent from the government, Sjahril said the two key
criteria were for the bank to have autonomy in setting interest
rates and in deciding which monetary aggregates to target.

An attempt to show the central bank's will to cut its formerly
close ties to the government can be seen through the decision to
bring in former Bundesbank president Helmut Schlesinger as an
advisor.

"But it's too soon to say" whether the Indonesian Central Bank
can become the Asian mirror of the Bundesbank, Sjahril cautioned.

Sjahril was speaking to Dow Jones on the sidelines of the Bank
for International Settlements' annual meeting.