Indonesia's currency has fallen to two-year low, prompting the country's central bank to announce measures to stabilise the rupiah. But there appears to be little consensus as to the cause of the drop in the foreign investment climate. While some economists are blaming the uncertainty of Indonesia's long election cycle, others are pointing to the international rise in petrol prices.

Presenter/Interviewer: James Panichi

Speakers: Julian Week, economist, IDEAglobal; Burt Hofman, lead economist, World Bank, Indonesia.

Panichi: Just days since the start of Indonesia's official presidential campaign, the rupiah hit a low of 9,550 to the US dollar. And while Bank Indonesia governor BurHAnuddin Abdullah says the low is temporary, market players are showing signs of nervousness, with foreign investment down by 49 per cent this year. But why the concern, and why now? According to Julian Wee, an economist with IDEAglobal in Singapore, it's all about politics.

Wee: A lot of traders were sidelining, basically. They want to wait and see if there's going to be any violence, or how candidates' progress – especially Wiranto, I think, is one that the markets are quite concerned about because he's not a popular choice.

Panichi: In terms of the political issue, I suppose it could be argued that people knew that the elections were coming for quite some time. So is it, in a way, a bit unusual that there should be this level of uncertainty?

Wee: Not really. The rupiah's interest rates are quite high, so if you're not expecting violence you wouldn't want to sell the rupiah because you'd have to pay quite a high cost. So people naturally wait for when they think risk levels are high and given that this is the campaigning month, the risk levels would be highest now.

Panichi: The dive in the rupiah has prompted Indonesia's central bank to announce a series of measures to absorb over four billion US dollars worth of currency. Bank Indonesia will also tighten rules to reduce foreign speculation on the rupiah – speculation which Mr Abdullah had already blamed for the currency's woes. But not everyone agrees that political uncertainty in the lead-up to the presidential election is to blame. What's more, not everyone sees a weaker currency as cause for concern. Burt Hofman is the lead economist at the World Bank's Jakarta office.

Hofman: Well, for now, given the moderate slide, it could actually be a good thing. Firstly, it makes Indonesia's exports more competitive internationally, and Indonesia's exports have not done very well over the last couple of years, so this might actually be an opportunity. Second, for the budget it's a bit plus and minus, but on the balance it's probably still a little bit positive because if the exchange rate goes down then some Value Added Tax income goes up and, of course, they have to pay more debt service as well. But they also finance from abroad, so the financing in rupiah terms goes up. So, on balance, it's almost a little bit positive for the budget, actually.

Panichi: The World Bank also rejects recent speculation suggesting the rise in international fuel prices is compounding the problem. Although Indonesian government subsidises have capped petrol prices, Mr Hofman says Indonesian fuel exports are also attracting a better price. And that would leave government coffers no worse off.

Hofman: It's not just oil. The oil balance by now, on the balance of payments, is slightly negative, so Indonesia imports a bit more oil than it exports. But it exports a lot more gas and gas prices, by and large, move in line with oil. So, the oil and gas balance is still strongly positive and we calculate that for every dollar increase in the oil price, the oil and gas balance is positive of about 70 to 100 million US dollars for Indonesia. So, it's a positive thing. The second part is the impact on the budget: it's a bit more complex because nowadays the central government shares revenues with the regional government. And in addition it pays out fuel subsidies. And those fuel subsidies go up if the oil price goes up and revenue sharing goes up if the oil price goes up. So, even though Indonesia's budget gets more revenues, they also have more expenditures. On balance, though, there is still a slight positive for the budget as well.