Govt, BI step in to ease impacts from U.S. woes

Aditya Suharmoko ,  The Jakarta Post ,  Jakarta   |  Tue, 09/16/2008 10:25 AM  |  Headlines

The government and central bank pledged Monday to help ease volatility in the country's financial markets as global economic jitters hit home.

Ministry officials said investors should remain calm amid the financial turmoil as the country's macroeconomic fundamentals remain strong, as shown by controllable inflation and economic growth of 6.4 percent in the first half of 2008.

"The government and Bank Indonesia (BI) will monitor this (volatility) and coordinate in preparing measures needed to minimize losses suffered by the financial sector, and the national economy," the Finance Ministry said in a statement.

BI may purchase bonds from the secondary market while the government will cut this year's bond-sale target to ensure liquidity for banks.

The ministry estimates a cut in bond issuance from Rp 158 trillion (US$16.8 billion) to Rp 143 trillion.

BI would buy government bonds, if needed, to inject liquidity into the market, according to the ministry.

The government and the central bank are taking meticulous care to limit the impact of the credit crunch in the United States from spreading to Indonesia, Southeast Asia's largest economy.

"If the U.S. sells more bonds to bail out banks, foreign investors may withdraw from Indonesian assets to seek safer assets, which are those offered by the U.S.," said the Finance Ministry's director general of debt management Rahmat Waluyanto.

So far, there have been no massive bond redemptions from foreign investors, who currently hold Rp 107.14 trillion in securities.

"There are no big redemptions thus far," Rahmat said.

Investor retraction from Indonesian securities may undermine the rupiah as against the U.S. dollar, fueling inflation as costs for imports soar.

The central bank has repeatedly said it would ease volatility in the rupiah by intervening in the currency market, buying more rupiah to keep its demand level with that of the U.S. dollar.

As some investors are likely to pull out of Indonesia to hunt for dollar-based assets, the country will ensure sufficient liquidity in the market to help prevent a lack of cash, which could drive banks to insolvency.

Finance Minister Sri Mulyani Indrawati said the government would immediately activate its Rp 120 trillion state budget -- which remains idle in BI's account -- to help shower the market with liquidity.

Copyright © 2008 The Jakarta Post - PT Bina Media Tenggara. All Rights Reserved.