Andrew Marshall, Jakarta, – Crisis-ridden Indonesia is not short of worries on the economic front, but policy makers are now grappling with an unexpected new concern – is the beleaguered rupiah bouncing back too strongly?

President B.J. Habibie has hailed the rupiah's gains as a sign of newfound confidence in Indonesia. The currency climbed to 6,975 against the dollar this week, recapturing levels not seen since early February, before the political and economic turmoil that accompanied former President Suharto's fall sent it reeling. Analysts agree that the rupiah's recent rise is good news for indebted Indonesian firms, and will allow the country's crippling interest rates to fall to more tolerable levels. But they warn that exporters now face a tougher challenge, and that the most important goal of exchange rate policy should not be a stronger currency but a more stable one.

Chief economics minister Ginandjar Kartasasmita said on Wednesday he hoped the rupiah would not climb beyond 5,000 to the dollar as this could hurt exports, and he regarded the best equilibrium rate for the currency as between 7,000 and 8,000. The rupiah, which stood at around 2,400 to the dollar in July 1997, has traded as low at 17,000 this year.

Ginandjar's comments sparked a rupiah retreat on Thursday, with dealers saying it seemed the authorities were uncomfortable with a rate stronger than 7,000. Analysts said they expected the central bank would stop converting dollars from aid and loans into rupiah, something which has helped lift the currency in recent months. Ginandjar told Reuters on Thursday authorities would not act to halt the rupiah's rise. "The government will not interfere if the rupiah strengthens beyond 7,000," he said. "(Bank Indonesia) will continue to buy rupiah to convert its dollar loans."

Bank Indonesia Managing Director Miranda Goeltom also stressed the government would not stand in the way of a firmer rupiah, and said further strengthening beyond 7,000 was likely.

Many analysts remain pessimistic about the rupiah's longer-term prospects, saying it could easily tumble from its recent peaks. They say a sustainable rate must be found if economic recovery is to take root, and that rate would be weaker than current levels. "The key word is stability. It's not just that a strong rupiah is good," said Alex Wreksoremboko, head of research at Merrill Lynch in Jakarta. He said the rupiah's gradual strengthening between July and September provided a relatively stable environment for business. "The last two weeks have destroyed the image of stability created between July and September. Now we are all left guessing again and you cannot expect new employment opportunities to be created, you cannot expect new investment in this sort of environment. It concerns me the rupiah is volatile again."

He said a strong rupiah need not be a major burden for exporters, as the price of imported raw materials would also fall. But without stability, firms would find adjustment hard. "I have been worried because it seems the strengthening of the rupiah is hurting the one sector of the economy that is still working, the only engine left – the export sector," he said.

Sani Hamid, analyst at MMS Standard & Poor's in Singapore, said an ideal scenario for the rupiah would be a short-term stabilisation at or slightly above current levels to ease debt repayment and allow production to restart, followed by a creeping rupiah depreciation to allow exports to be boosted.

"But achieving this ideal scenario will be very hard," Hamid said. "In the very short term it could go to 6,500 or even 6,000 if the stops are triggered. But in the next three to six months it's hard to see how it can sustain these levels." He said maturing short-term corporate debt, plus worries about instability ahead of elections due to be held in May, were likely to rattle the rupiah and could push it back to around 11,000. Analysts agree that one benefit of the rupiah's gains is that it provides room for interest rates to ease further. But they warn that expectations the stronger currency will spur debt repayment may be premature.

Chia Woon Khien, head of Asian research at SEB in Singapore, said the corporate sector would find debt repayments tough anywhere above 5,000 rupiah. Desmond Supple, director at Barclays Capital in Singapore, said few firms would be able to afford repayment even if the currency climbed to 6,000.

"For a certain group of companies which are bankrupt, of course a stronger rupiah is good," Wreksoremboko said. "But do we really want to save this group of people only? In my view what is important is creating employment, and the private sector will not move unless the rupiah is stable."