Indonesia fears end to economic recovery--in a spin over drop in value of rupiah

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Indonesia fears end to economic recovery--in a spin over drop in value of rupiah

By Tim Dodd, Jakarta

Indonesia's President, Mr Abdurrahman Wahid, yesterday ordered a review of his Government's Budget as fears grew that weakness in the currency would upset the country's delicate economic recovery.

But Mr Wahid further confused the economic prognosis by insisting that Indonesia was on track for growth of at least 5 per cent this year, only a day after the Central Statistics Bureau downgraded its GDP growth estimate to only 1.5 per cent because of the slide in the currency.

The rupiah was trading at 8,525 to the US dollar last night, compared with the Budget's assumed rate of 7,000.

Unless it recovers soon, its low value will drive up inflation and interest rates. The fears of an early end to the recovery have also been fuelled by concern about Indonesia's lack of progress on economic reform and the lack of direction in policy making.

In yet another about-turn, President Wahid yesterday urged the central bank and State-owned banks to act to boost the rupiah's value.

"I have asked the Finance Minister to persuade State banks to help [boost the currency]," he said at a news conference.

"I have also asked Bank Indonesia [the central bank] to take necessary action to stop the rupiah weakening."

This came after a confusing series of statements on the currency. On Friday, the President said he would take action if the rupiah continued to slide, but on Monday he said he had been misinterpreted.

Any market intervention to boost the rupiah is unlikely to be credible, given the variety of official statements in recent days. Last week Bank Indonesia's senior deputy governor said the bank was willing to use reserves to back the rupiah. But it backed away from this stance and by Monday a deputy governor was saying it would be pointless to intervene in a panicked market.

The Budget review, to be conducted by the Finance Minister, Mr Bambang Sudibyo, will estimate the impact of the rupiah's low value, including a possible rise in inflation and interest rates, according to a statement from the presidential palace.

Mr Bambang had been asked to "take necessary actions to mitigate the negative impact", it said.

Concern about the strength of Indonesia's recovery rose on Monday after official GDP figures revealed growth of 3.1 per cent in the last four quarters compared with forecasts of 4-5 per cent.

President Wahid insisted yesterday that the recovery would continue. "For the whole year, growth will be between 5 and 5.5 per cent. I'm not an economist, but that's my prediction and this is on the conservative side," he said. However, if the rupiah remains weak and sends up inflation and interest rates, Indonesia's economy will be badly hit. Higher interest rates will drive up the interest cost on the $90 billion worth of bonds being issued to fund the recapitalisation of the banking system - which the Government can ill afford.

The weak rupiah also makes conditions very difficult for industries that rely on foreign inputs.

Yesterday the rupiah remained relatively stable in thin trading as markets waited for a US Federal Reserve decision on rates.

http://www.afr.com.au/content/000517/world/world1.html

-- Carl Jenkins (Somewherepress@aol.com), May 17, 2000


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