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Last Updated: Tuesday, 30 August 2005, 10:04 GMT 11:04 UK
Indonesia moves to bolster rupiah
A kerosene retailer fills jerry cans in Jakarta, 29 August 2005.
Indonesia has been hit by soaring global oil prices
Indonesia has taken steps to strengthen its currency after record oil prices fanned fears of an economic crisis.

The central bank raised interest rates on Tuesday to 9.5% from 8.75%, halting an eight-day slide in the rupiah.

The currency had tumbled to its lowest levels since 2001 as concerns spread to the country's stock market.

Indonesia, which heavily subsidises domestic fuel costs, has been selling the rupiah and buying US dollars in order to pay for crude oil imports.

Lightening fast

"The currency is moving at the speed of light," said Fauzi Ichsan, an economist at Standard Chartered.

President Susilo Bambang Yudhoyono looked to calm fears, saying on Tuesday that the recent slide in the rupiah did not herald an economic collapse like the one that shook the country in 1997-8.

I believe that we will find the solution and the appropriate steps to overcome this problem
President Yudhoyono

"The conditions and situation of our economy are different," President Yudhoyono said, adding that he would announce measures aimed at further bolstering the rupiah on Wednesday.

Since the start of the month, the rupiah has fallen by close to 10% against the US dollar.

Traders said that more declines were possible unless the central bank and government took further steps, which could include the speeding up of privatisation and cuts to fuel subsidies.

Some called for interest rates to go above 10%.

Turn around

Tuesday's interest rate hike seems to have propped up the currency for now.

The rupiah gained 2.2% to 10,600 against the US dollar after the central bank's announcement, even though it had dropped almost 9% in earlier trading on Tuesday.

Piles of rupiah notes
The rupiah has had a roller-coaster ride in recent trading sessions

Jakarta's stock market also recouped early losses, ending Tuesday more than 4% higher.

Analysts said that Indonesia, as a developing nation, was more at risk to movements in the oil price than many of the more developed nations, whose economies have a greater focus on services.

The cost of crude, and in particular petrol, are sensitive issues in a country that is struggling to keep up with the power needs of its fast-growing population which is increasingly hungry for consumer goods.

Millions of Indonesians have been affected by black-outs and the government is urging people to conserve power so as not to overload the grid system.

Price pressure

Heeding the calls by analysts to raise domestic fuel prices - which are subsidised and are now eating further and further into state spending budgets - may prove difficult and unpopular.

Earlier this year, a 29% increase in the cost of fuel led to nationwide protests, and fuel protests contributed to the downfall of former President Suharto in 1998.

President Yudhoyono agreed "that there is a need for significant steps to be taken by our monetary authority, Bank Indonesia and by the government especially on fiscal policies and other economic policies".

"I believe that we will find the solution and the appropriate steps to overcome this problem," he said.


SEE ALSO:
Oil close to highs as storm rages
30 Aug 05 |  Business
Indonesia hit by petrol shortages
18 Jul 05 |  Business


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