Andrew Marshall, Jakarta – The rejuvenated Indonesian rupiah broke through the 7,000 level against the dollar on Wednesday for the first time in more than eight months, providing a ray of hope for an economy crushed by crippling debt and interest rates.

Analysts warned, however, the currency's strength was more due to temporary technical factors than any major reassessment of economic and political risk in the crisis-ridden country.

But they said the rupiah's gains created a window of opportunity for the government to push through the reforms needed to kick-start the economy. The crucial questions are how long the rupiah can sustain its gains, and whether the government proves willing and able to seize its chance. "If they fail to utilise this moment Indonesia is in trouble," said Budi Hikmat, economist at Bahana Securities in Jakarta.

The rupiah was quoted at 7,150/7,250 at 0745 GMT after earlier hitting 7,000 for the first time since February 12, before the economic and social chaos surrounding former President Suharto's fall from power dragged it downwards.

The currency sank as low as 17,000 in June as Indonesia reeled from the political uncertainty and economic damage caused by the mass unrest that accompanied Suharto's resignation on May 21. But over the last two months the currency has mounted a steady comeback, vaulting the crucial level of 10,000 to the dollar early this month. A rupiah recovery to 10,000 in the fourth quarter of 1998 was a crucial assumption of Indonesia's reform programme agreed with the International Monetary Fund in June.

Analysts say there are several reasons for the rupiah rally:

The government has been converting billions of dollars in foreign loans and aid into rupiah, in a thin market where even one million dollar positions can affect the exchange rate.

Interest rates remain very high despite recent falls.

Dollar demand has weakened because both the government and private sector have cut back on their servicing of foreign debt. Most companies have stopped making debt payments and a deal struck with the Paris Club allowed the government to reschedule $4.2 billion in payments due up to March.

Partly due to a collapse in imports, Indonesia is posting a healthy trade surplus of more than $2 billion a month.

The yen has made dramatic gains against the dollar.

Many analysts say the currency could reverse direction and head lower in the months ahead, particularly if social unrest flares up around a meeting of Indonesia's highest legislative body, the People's Constitutional Assembly (MPR), on November 10.

A wave of mysterious killings in East Java which some blame on a political conspiracy, continued student protests and sporadic outbreaks of unrest are keeping the market wary. "There is no substantial improvement in domestic affairs. Look at the mysterious killings in Banyuwangi and the tension in the country," Hikmat said.

Barclays Capital says the rupiah could fall as low as 18,000 within 12-18 months if financing the country's budget deficit and bank restructuring programme unravels its tight monetary policy.

But many analysts believe the rupiah can hang on between 7,000 and 8,000 in the months to come. "We will come to a stage where Indonesia will stop converting foreign money they receive into rupiah. So the strength of the rupiah will be capped here," said Daniel Lian, head of Asian markets research at ANZ Investment Bank in Singapore. "But nevertheless it will maintain a firm tone even if we see an easing of interest rates."

Analysts say the rupiah's strength will help bring inflation under control and allow interest rates to be cut, allowing companies and banks to breathe. The country's massive foreign debt burden is also becoming more manageable, although even with the rupiah at 7,000, most companies remain technically bankrupt.

"Companies are hopeful about the (rupiah) trend but it hasn't come down far enough. Interest rates are still around 50 percent," said Manggi Habir, president director of Indonesia's Pefindo credit rating agency. "We need more time. Around 5,000 to 7,000 would be the right range."

However, analysts say a rupiah at 7,000 will allow the country to import more of the fertiliser and pesticides needed to boost food production, and help smooth the path of its planned bank recapitalisation programme, a crucial prerequisite for recovery.

"At 15,000 to the dollar, the bank recapitalisation programme was a dead loss," said the head of research at a foreign brokerage in Jakarta. "At 7,000, it might just work."