Government will keep rupiah gains in check, says Mulyani

Rupiah rapid gains against the greenback, despite concerns over negative impacts on trade balance and debt payments, is acceptable while in line with fundamentals, the Finance Minister says. "What's important is Bank Indonesia *BI* and the govern-ment maintain the exchange rate of the rupiah against other currencies so that the deviations are not too far from the foundations," minister Sri Mulyiani Indrawati said Friday. She added that the economic foundations included economic performance and low inflation. "As long as the foundations are maintained, the rupiah will be at a reasonable value, which doesn't create room for speculation." The rupiah has gained 15.3 percent this year coming up to 9,450 to the US dollar as of Friday, making the Indonesian currency the best performer among 10 Asian currencies this year excluding Japan. Mulyani said exports may have a slower recovery if the rupiah strengthens too fast against the dollar, while increases in imports may also create tougher competition for domestic industries. "If the dollar weakens, it means imports are relatively cheap. This will become a challenge to domestic industries," she said. "What should be strengthened is that investment, and consumption should remain strong." Indonesia's economy is 60 percent driven by private consumption, while investment contributes about 10 percent. Indonesia expects investment to increase next year to achieve a 5.5 percent growth rate as targeted by government in the assumptions behind the 2010 state budget, while private consumption will most likely stay at about the current level. "This becomes a challenge for us to improve the cost of investment so that it becomes lower. Whether it's by lower inflation and lower interest rates, or by reform of the bureaucracy, would help reduce overall business costs," said Mulyani. The fluctuations in world currency exchange rates also creates a challenge to the government's debt management program. For example, although dollar-denominated debts may decrease, yen-denominated debts may rise. "About 30-35 percent of our debts are in yen, which is now strengthening significantly against the dollar. This will create a challenge to us," she said. The central bank clearly does not want the rupiah to climb too quickly against the dollar. "We don't want the gains in the rupiah to accelerate too fast. The rupiah should not be too strong," said BI deputy governor Hartadi Sarwono, who is in charge of monetary policy at the central bank, as quoted by Bloomberg Friday. Having the national currency trade at about 9,400 against the dollar is still acceptable and in line with the fundamentals of the economy, Sarwono said. Indonesia's currency needs to remain strong enough to counter any acceleration in inflation that is expected to pick up next year because of possible increases in commodity prices, Sarwono said. Indonesia's central bank expects inflation to accelerate to between 4 percent and 6 percent next year, it said on Oct. 5. Consumer prices in Southeast Asia's largest economy rose 2.83 percent in September from a year earlier after gaining 2.75 percent in August.

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