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Indonesian Currency Continues Downward Spiral - 2004-05-26

Indonesia's currency, the rupiah, has been steadily losing value over the past few days, and on Wednesday hit a 19-month low against the dollar. The weakened currency could have damaging knock-on effects for an economy that is still trying to recover from the Asian financial crisis of the late 1990's.

On Wednesday the rupiah was trading just under 9,300 to the dollar, a decline of 6.5 percent since the beginning of the month. The currency is down over 10 percent this year.

Fauzi Ichsan is a vice president for global research at Standard Chartered Bank in Jakarta. He says the strengthening dollar has hit currencies across Asia, but the drop in the rupiah has been exacerbated by several factors, both domestic and overseas.

"Mainly it is panic buying of dollars when the rupiah hit nine thousand. Of course there are other factors including the oil price and politics," says Mr. Ichsan. "Oil price keeps going up and Indonesia now is a net importer of oil. If oil price continues to up the government will have a budgetary problem." He expects the rupiah to float between 8,900 and 9,400 until the presidential elections in July are out of the way.

The falling currency could hurt Indonesia's economy and has few benefits. The country's export sector is relatively small, and imports are rising more than seven times faster than exports. A weak currency makes imports more expensive.

The country also has a large overhang of dollar-denominated debt, a legacy of the heady borrow-and-spend days in the mid-1990's, when Indonesia was one of the Asian tiger economies. The drop in the rupiah will make debt repayment more difficult, particularly for borrowers with rupiah-denominated earnings.

In the economic crisis that began in 1997, Asian currencies plunged in value, and most stock markets in the region lost more than half their value. In Indonesia, the result recession and massive job losses and bankruptcies led to the ouster of the country's long-time president, Suharto.

In the past few days, the government has intervened in the market to slow the fall and head off a possible crisis.

The slipping value of the rupiah has been felt in the stock market, which has been falling rapidly. And the government has scrapped a $4 million bond issue because the weak currency meant investors were demanding a high interest rate on the bonds. The bond issue was intended to raise money for the government's budget.

The finance minister warned on Wednesday that the budget deficit will exceed expectations because of rising oil prices, and a long-term slump in the value of the rupiah can only make that situation worse.