Indonesia's rupiah set to resume fall

The rupiah has plunged in recent weeks on political and economic turmoil

By Staff and wire reports

JAKARTA, Indonesia -- Indonesia's sickly currency could still get worse, its chief banker said Friday.

The International Monetary Fund also reports that the currency's problems will continue while its political scene remains fragile.

Embattled Indonesian president Abdurrahman Wahid faces a second censure from its parliament on Monday. Fears of violence on Monday have taken their toll on Indonesia's currency markets.

The legislature first censured Wahid in February, after he was implicated in a multimillion dollar corruption scandal. By censuring him a second time, the parliament moves one step closer to possible impeachment.

Wahid refuses to resign. This week he said he will serve out his term through 2004.

He planned to address the nation Friday evening, as supporters streamed into the capital for a Sunday rally.

Rupiah hits 31-month low

President Wahid faces the prospect of a second censure next week

The uncertain political picture has decimated the rupiah. It has been forced to levels not seen since 1998, in the fallout from the Asian financial crisis.

The rupiah hit a 31-month low on Thursday. It also broke through the key 12,000 barrier against the U.S. dollar.

"The rupiah is already very undervalued but … can weaken further," central bank governor Sjahril Sabirin said Friday.

The rupiah was trading at 11,825/11,915 on Friday, with the central bank selling dollars to prop it up.

The currency is substantially undervalued, according to Daniel Lian, Southeast Asian economist with Morgan Stanley. Lian noted that 10,500 to the dollar is a more-realistic level.

But the Indonesian government has to introduce a more realistic budget and cut its debt substantially before the situation improves. Cutting its debt levels will take years of work, requiring constant growth, low inflation and the like.

"These present very tall orders for the country to meet," Lian wrote in a report.

IMF still holding up loan package

The currency is likely to continue its decline while doubts about Indonesia's political scene continue. A foreign-exchange trader said on Friday that 13,500 was possible.

The International Monetary Fund noted in its World Economic Outlook report that worsening market sentiment about Indonesia's prospects is weighing on the currency.

The IMF has held up a vital $400 million loan package to Indonesia. A team which briefed Indonesia's key donors during a meeting in Jakarta this week left without making it clear whether that loan would go ahead.

The IMF is stepping up its pressure on the government to be more responsible with its spending.

"Despite a pickup in activity in 2000, the economic and political situation in Indonesia remains very fragile," the IMF stated in the report.

"Debt restructuring and asset recovery remain key to maintaining a sound macroeconomic framework supported by safeguards to minimize the risks associated with ongoing fiscal decentralization," the IMF said.

The economy of Indonesia, the world's fourth most populous country, has slowed to 3.5 percent growth this year, the report states. That's down from 4.8 percent in 2000.

The World Bank expects little progress. It has warned of the risks of the current crisis and pushed for change but does not envision much movement.

"We are still very much in our base case, muddle-through scenario," Mark Baird, the bank's country director for Indonesia, said.

Baird, who chaired the Jakarta talks this week between the Indonesian government and foreign donors, said the currency could improve if the economy and market sentiment turn around.

Reuters contributed to this report.

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