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.