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To: Michael who wrote (7587)	2/15/1998 11:53:00 AM
From: Richnorth	Respond to of 116995

Rupiah peg divides analysts Proposal for currency board system yields heated debate, confusion February 12, 1998: 9:06 a.m. ET Indonesia Net Exchange Jakarta Stock Exchange More related sites... JAKARTA, Indonesia (Reuters) - Indonesia's move to peg its rupiah currency to a fixed rate has sharply divided economists in the region, with both camps taking strong positions for and against the idea. Finance Minister Mar'ie Muhammad said Wednesday that the government is preparing the groundwork for adopting a currency board system, under which the rupiah will be positioned at a fixed rate and covered by central bank reserves. But he gave no further details and there were no comments from the government on the subject Thursday. Meanwhile, hundreds of people rioted in the West Java town of Jatiwangi and set shops on fire in protest against rising prices as President Suharto called on the powerful military to clamp down on unrest. It was the latest in a series of flare-ups across the Moslem-majority nation of 200 million people as inflation and unemployment spread because of the intense economic crisis aggravated by drought. "The currency board has caused a lot of confusion," said David Chang, head of research for Trimegah Securities. "Opinions are divided and the government seems undecided if it will go through with it or not." Protagonists say the move will stabilize the embattled rupiah at a level where Indonesian companies will be able to repay debt, control sharply rising inflation and bring the nation's battered economy back to an even keel. "This is the last chance. It has to be supported totally. There is no option," Soc-Gen Crosby's head of regional research Neil Saker told a news conference in Singapore. He said the system would help stabilize the currency and thus help solve other economic problems in Indonesia. The board would be "the least worst option to prevent hyper-inflationary meltdown," he said. "If things go wrong with the currency board, it will go down all the way. There will be no anchor to stop it," he added. Critics were equally adamant. They said high interest rates would be necessary to back a fixed rupiah rate, which would spell disaster for the economy. "It may be okay for some time but in the long term there's no good argument for fixing exchange rates," Commonwealth Bank of Australia managing director David Murray told reporters after delivering a speech in Melbourne. In the short term, a fixed exchange rate could give Indonesian companies greater certainty in trying to repay foreign currency debt and also restore some price stability, he said. "But, long term, there's not much point," Murray said. U.S. Treasury Secretary Robert Rubin said Indonesia must strengthen its banks and reaffirm its commitment to reforms before introducing a currency board, an inflexible system that fixes the domestic currency to a convertible one and ties cash in circulation, dollar-for-dollar, to central bank reserves. "There are a lot of issues that need to be worked through before you get to the question of whether or not you have a currency board," Rubin told reporters. "There are a lot of issues that go to the question of having the credibility in the financial markets to adhere to the reform program," he said. The International Monetary Fund, which masterminded a $43 billion loan program for Indonesia last November, said it has started talks with Indonesia about what must be done to bring in a currency board. But a spokesman gave no details. "These discussions are likely to be going on for some time and we have nothing firm to say for the time being," he said. The head of one securities firm in Jakarta said he disagrees with his own regional economists over the plan. "My personal feeling is things can't get much worse," he said. "There is already high inflation and companies can't pay their debts. A currency board will at least solve some problems. But the company's view is that we don't think a currency board will work." Chang, from Trimegah Securities, said whatever happens, difficult times lay ahead. "There is going to be hardship somewhere," he said. "Whether there are high interest rates or a low currency, either way we have to take some pain."