Indonesia back to the brink in currency clash

INDONESIA is moving back to the brink in a renewed confrontation with the International Monetary Fund (IMF) over the establishment of a currency board. Investors, already jittery about prospects for Indonesia, responded yesterday by wiping 28 per cent off the value of the local currency.

Although Indonesia is detaching itself from the fate of other financial markets in East Asia, fears of another rout in Jakarta sent all regional currencies spiralling downwards, including an unexpected devaluation of the Vietnamese dong. All stock markets also fell but, surprisingly, Jakarta bucked the regional trend and managed a 2.1 per cent gain.

President Suharto of Indonesia has shown no sign of budging from his determination to establish a currency board for the Indonesia rupiah which would tie its value at a fixed rate to a stronger currency, almost certainly the US dollar. His officials argue that the country has the resources to make a board work. They state that there is $19bn (pounds 11.6bn) in reserves, enough to cover the 78 trillion rupiah in circulation. Under a currency board system there must be sufficient foreign currency holdings to back all local currency in circulation.

Indonesian companies owe international creditors $74bn. Many are technically bankrupt and could only be saved by a lower exchange rate with the dollar. Michel Camdessus, the IMF managing director, has written to President Suharto, telling him that the $43bn IMF rescue package would be in question if he goes ahead with the currency board.

Yesterday Gordon Brown, Chancellor of the Exchequer, said European Union finance ministers agreed with the IMF that it would be premature to set up a currency board system for Indonesia's rupiah. Speaking at a meeting of EU finance ministers in Brussels, he said there were a number of preconditions which had to be met first.

Pressure against the board has also come from the US and Japan, which is sending officials to make their case personally in Jakarta.

The Indonesians are frustrated by the lack of positive investor response to IMF measures and increasingly worried by the rioting in protest against price rises. They feel that a move to bring stability to the rupiah will go a long way to restoring confidence in the economy.

This view is not shared by anyone outside Indonesia. "No one believes this will work," said Howard Georges, vice-chairman of the South China Brokerage in Hong Kong.

"A currency board will make Indonesia a sitting duck for another attack," said Lye Thiam Wooi, a fund manager at OUB Asset Management in Singapore.