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Rupiah slides on mounting political fears

Source
Reuters - January 13, 1999

Andrew Marshall, Jakarta – The Indonesian rupiah dropped more than five percent against the dollar on Wednesday on regional weakness, fears of fresh domestic unrest and wrangling over the new budget.

The rupiah's sudden fall sent tremors through the stock market, where a firmer currency is crucial for scores of debt-ridden firms. The bourse fell 3.92 percent to 419.10 points. By the end of Jakarta trading the rupiah was quoted at 8,550/8,650 to the dollar, after trading as low as 8,650, its lowest in more than two months.

Dealers said the rupiah's problems were set to continue. "Support at 8,600 has been taken, I don't see anything standing in the way of 9,000 now," said one trader at a European bank in Jakarta.

The rupiah had a brief respite after central bank governor Sjahril Sabirin pledged to step in to help the currency recapture the 8,000 level. But there was no sign of intervention, and the decline soon picked up steam again.

Dealers said the rupiah's slide had been sparked by a general weakening in regional currencies against the dollar as investors cut back on their positions amid concerns about a deepening financial crisis in Brazil.

"The initial cause was probably Brazil," one said. "Later, when Bank Indonesia said it would intervene the rupiah firmed to 8,300, but because there was no action from Bank Indonesia the market recovered its positions."

Dealers and analysts said numerous other worries had contributed to the rupiah's decline. "There have been things building up for a few weeks, and maybe today, given the relatively strong dollar, was the day to take advantage of that," said Clifford Tan, forex strategist at Warburg Dillon Read in Singapore.

"The primary concern is about what happens after Ramadan is over. What will happen to the pace and the fervour of political protest across Indonesia? That's issue number one."

Indonesian students have vowed to resume mass anti-government rallies after the Eid al-Fitr festival on Tuesday and Wednesday which marks the end of the Moslem fasting month of Ramadan. A series of bloody clashes between security forces and students came to a halt last month when students stopped their protests for the Moslem fasting month.

Analysts said a battle between the government and parliament over Indonesia's 1999/2000 budget had also rattled markets. Parliament said this week the government should cut the amount of money it is spending on the crucial bank recapitalisation scheme and revise some budget estimates.

"The parliamentary infighting over the budget – that's new for Indonesia, given that it was a rubber-stamp body in the past," Tan said. "In other countries like Mexico the political cost of paying for these large recapitalisations has often become quite a large issue."

Dealers said concerns that the beleaguered armed forces could disintegrate was also weighing on the currency. Bank Indonesia has been converting $5-15 million a day of aid and loan money into rupiah in recent months, giving a significant boost to the currency.

Analysts said the thin market meant Bank Indonesia intervention could be relatively effective, but warned the funds to be converted into rupiah could soon start drying up. "They have to (defend the rupiah), but we think that the trend is going to be more for a depreciation," said Mangal Goswami, economist at ABN AMRO in Singapore.

"Official aid money is going to taper off, the current account is going to fall.... These are all factors that are going to go against the rupiah."

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