Forex Blog: Currency Trading News & Analysis.

August 30th 2005

Indonesia to mitigate currency crisis

Supported by booming economies, most Southeast Asian currencies have soared in recent years. Indonesia’s currency, the Rupiah, unfortunately has not fared well, declining recently to a 45-month low against the USD. The cause is not economic malaise, but rather the rising price of oil. For whatever reason, Indonesia expends a great deal of effort and money on artificially lowering the cost of fuel, typically by meting out fuel subsidies to consumers and businesses. As the price of oil has risen, so have Indonesian fuel subsidies, which now consume nearly 1/3 of Indonesia’s budget. This has exerted a tremendous strain on Indonesia’s money supply and credit markets, to the point where economists now reckon the Central Bank needs to raise interest rates by 100 basis points (1 percentage point) in order to prevent a full-scale currency crisis. The Financial Times reports:

Should the currency slide further and remain below Rp11,000-12,000 to the dollar for a quarter, they say, it would lead to corporate defaults and put pressure on the banking system.

Read More: Indonesia expected to act as currency slips further

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Posted by Adam Kritzer | in Central Banks, Exotic Currencies | No Comments »

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