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Indonesian Currency Sinks as Oil Prices Climb


Indonesia's president is pushing for more action to halt the plunge in the country's currency, now at its lowest value in more than three years. Rising oil prices and a lack of public confidence have pushed the rupiah to nearly 10,300 to $1 (US), despite efforts by the nation's central bank to halt the slide.

President Susilo Bambang Yudhoyono says the government and the central bank must act quickly to bolster the rupiah, now at its weakest level since early 2002.

After a late-night meeting Wednesday with the governor of Bank Indonesia, President Yudhoyono warned tough measures may be needed, such as cutting subsidies for fuel and other goods.

He also urged currency speculators to stop selling the rupiah, which has fallen about 10 percent in value this year.

Rising oil prices and concerns over the government's finances set off the rupiah's slide.

Ramesh Subramaniam, the principal economist for the Asia Development Bank in Jakarta, says it is difficult to tell if speculators are taking advantage of the situation. He says, however, that a lack of confidence is contributing to the rupiah's decline.

"Right now it looks like it's primarily the confidence factor from our point of view since it hit the 10,000 barrier, obviously that is a key factor and due primarily to the oil price situation and the demand for dollars, but mostly it's a psychological factor sort of building in," he said.

On Wednesday, Bank Indonesia raised a key interest rate by a quarter of a point, to 7.5 percent, to encourage people to buy the rupiah. Over the past several weeks, the central bank also has intervened repeatedly in currency markets, spending billions of dollars from its foreign exchange reserves to buy rupiah.

Rising crude oil prices mean that Indonesia, the only net importer among the Organization of Petroleum Exporting Countries (OPEC), must spend more dollars to buy the fuel it needs.

In early trading Thursday in Asia, crude oil prices hit a record $68 a barrel.

However, the country's biggest oil company, PT Pertamina cannot fully benefit from rising prices. That is because it sells oil cheaply in Indonesia to help the government subsidize fuel supplies at home.

Chatri Basri, director of the Institute for Economic and Social Research at the University of Indonesia says he does not think the higher fuel prices will jeopardize the nation's economic growth.

"Because of you look at the economy, even our GDP [gross domestic product] growth is 5.9 percent for the third semester [quarter], it's even higher than the GDP growth last year and investment is still strong at about 13 percent for the third semester," he said.

The rupiah's fall is reviving harsh memories of the Asian economic crisis in the late 1990s. Most Asian currencies collapsed to record lows then, followed by regional stock markets. Many governments and companies were unable to repay foreign loans, leading to severe recessions and intervention by the International Monetary Fund. The rupiah, which had traded at about 2,500 to the dollar in early 1997, at one point sank below 16,000 to the dollar.

Indonesia's main stock index hit a record high in late July of nearly 1,200 points, but has since lost 12 percent, partly because investors have been rattled by the weak rupiah.

Mr. Subramaniam with the Asia Development Bank says the government needs to send the message the economy is doing well.

"We would think it's much more important for the government to be sending out clear messages that the real economy is, in fact, doing well and there is nothing basically that has changed with regard to the fundamentals of the economy," he said.

But for now, Mr. Subramaniam says, the rupiah is likely to continue to decline in the short term.

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