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Plummeting rupiah adds to Indonesia's woes

Rupiah photo
U.S. dollar holders take advantage of the weak rupiah  

In this story:

Threat to domestic economy

Continued demonstrations

Little interest in stocks

Money moving overseas

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JAKARTA, Indonesia -- Indonesia's central bank stepped in to help the troubled rupiah Tuesday as the battered currency hit a morning low of 10,600 to the U.S. dollar.

The decaying rupiah is the latest in a string of problems facing strife-torn Indonesia. As political unrest has intensified, its economic prospects look increasingly grim.

Indonesian stocks are trading at their lowest levels in two years. Investors say overseas interest has almost totally disappeared.

The rupiah improved to 10,275 late Tuesday after Bank Indonesia sold up to $30 million to prop it up. Chief economics minister Rizal Ramli said Tuesday the government would support the bank's efforts.

But observers worry the intervention will not work. Now the rupiah has breached 10,000, they fear it will resume its drop, possibly toward all-time lows.

The central bank sold some $12 million on Monday. Prior to the bank stepping in, the rupiah neared a 30-month low, around 11,210. Currency dealers say 12,000 is not out of the question.

Threat to domestic economy

The domestic Indonesian economy is surprisingly stable, but some experts believe the country itself is close to ungovernable.

HSBC's John Woods sees problems for exporters if the rupiah rises over 11,000
HSBC's John Woods sees problems for exporters if the rupiah rises over 11,000  

John Woods, head of research for HSBC, told Asia Business Morning that he sees trouble if the rupiah trades beyond 11,000 to the dollar. Exporters would struggle to make debt payments, he said.

The buckling rupiah is compounding a mound of problems that are hitting at once.

"We are getting a lot of nervousness," said Andre Cita, director of institutional sales for PT Kim Eng Securities. There are few positives about Indonesian economics, he said.

"From the international investor's perspective, the priority has to be social stability, and then political stability," Cita said. "Right now, there are indications of increasing social instability."

Continued demonstrations

Around 500 have been killed in clashes between ethnic Dayaks and Madurese settlers in the Central Kalimantan province.

There were reports Tuesday that the Indonesian army was warning it would take power if fighting worsened.

Demonstrations calling on President Abdurrahman Wahid to resign continue. Indonesian police estimated up to 20,000 protestors gathered at the Presidential Palace in Jakarta. Wahid's opponents want Vice-President Megawati Sukarnoputri to take over.

Faced with intensifying instability, overseas companies are pulling their operations. Last week Exxon Mobil shut its gas-field operations in troubled Aceh province.

Reports suggested it may reopen them this week, but the Jakarta Post said the knock-on effect would cause loses at Aceh-based companies.

Fertilizer makers PT Pupuk Iskandar Muda and PT Asean Aceh Fertilizer will lose $8.5 million in business, the paper reported.

That skittishness suggests Indonesia's situation is about to get worse, after three years of economic plight.

Indonesia is also trying to reach a deadlock with the International Monetary Fund over a $400 million loan it is trying to secure.

Without the loan, Indonesia will not be able to refinance a $5.8 billion debt with what is known as the Paris Club of official creditors.

Although some observers say the refinancing deadline might be postponed, an arrangement is necessary to bring some semblance of confidence in Indonesia' economy.

Credit-rating agency Moody's last week reduced its outlook on Indonesia's creditworthiness, blaming political strife.

Indonesian Foreign Minister Alwai Shihab said Monday he was hopeful the IMF talks would progress. He said delays in the Indonesian parliament were holding the talks up.

The IMF responded that it would continue discussions but that major issues need to be resolved. The loan has been on hold since December.

Little interest in stocks

The rupiah has put pressure on other Asian currencies, particularly the Singapore dollar and the Thai baht. It also means inflation is a threat in Indonesia.

Currency losses discourage international investment in Indonesian stocks.

Cita said that what little overseas investment remains in Indonesian stocks is required. Many emerging-markets mutual funds or index funds require a fraction of their holdings to remain in Indonesia.

But the money concentrates around a dozen Indonesian blue chips, such as cigarette makers PT Hanjaya Mandala Sampoerna and PT Gudang Garam. There is scant interest beyond the biggest issues.

Negative sentiment is causing even Indonesian retail investors to lose heart. Until recently, they had buoyed the market.

The Jakarta Stock Index was trading down at 390, its worst level since March 1999, on Tuesday afternoon.

Money moving overseas

The intensifying power struggle between the president and its lawmakers will likely delay much needed economic restructuring with reforms becoming bogged down in the legislature.

In response rumors abound that the government may attempt forced reforms -- a prospect experts say is encouraging rich Indonesians to move cash offshore, rather than rick losing it to the government.

Observers expect a closed-doors political solution, but that may not be enough to bring Indonesia's economy back from the brink.

"People now are worried about whether the country works," said Eugene Galbraith, chairman and CEO of AsiaWise.com.

Galbraith said the prospects for new investment are dim, either in stock or by international companies. Meantime, he expects Indonesians to move cash offshore and into U.S. dollars to preserve it.

A new government is necessary, he said. But he believes it will not be sufficient to turn around business and investor attitudes.

"I don't expect much change in sentiment for some while, sentiment is so smashed," he said.

Woods at HSBC agreed Indonesia has a long and uncertain struggle ahead of it.

"There's not a magic bullet that can stabilize the Indonesian economy," he said.

Reuters contributed to this report.



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