Stock Exchange and Rupiah Collapse
Tuesday, 23 May, 2006 | 16:13 WIB

Tempo Interactive, Jakarta: Jakarta's stock exchange collapsed yesterday. The composite stock price index dropped by 6.03 percent to the level of 1,309.045. This was the second biggest single-day drop this week after Monday of last week when the index dropped by 6.31 percent. Jakarta Stock's index once dropped by 6.6 percent after the May rioting in 1998. The rupiah underwent the same thing. Yesterday, the rupiah exchange rate was closed declining 120 points at Rp9,320 per US$.

But Jakarta's stock was not alone. The world's major stock exchanges crashed during yesterday's trade. Investors sold stocks and bought dollars after hearing that the Federal Reserve (the US Central Bank) will increase interest sharply to minimize high inflation.

A stock dealer of a local security company described, at yesterday's trade, the market panicked and sold stocks. “All they want is to sell,” he said yesterday.

An analyst of PT Trimegah Securities, Arhya Winarto explained the panic over the world's stocks including Jakarta's was because the investors were nervous in facing the Fed's plan to raise the interest aggressively. “The interest rate could reach 5.5 percent to 6.0 percent in the first semester of this year,” he said.

The Fed's high interest rate, he said, impelled investors to speculate that the domestic interest rate dropping to the level of 14 percent will not happen in the near future. “This has negative impact in banking and consumption sectors.”

An economist of Standard Chartered Bank, Fauzi Ichsan said, the possibility that the Fed's interest rate will go up to five percent made the market in regional exchanges transfer their investment from stocks to dollars or yens. This caused the regional currencies rate to weaken against dollar. “The rupiah also went down,” he said.

However, according to Fauzi, the drop in the stock exchange and rupiah yesterday were ordinary. “The stock and rupiah market increase progressively, so we must be ready for them to decrease progressively, too,” he said. He said that during the upsurge, there was not any fundamental economic growth.

An economist from the University of Indonesia, Chatib Basri, also believes in the last few weeks the rupiah's exchange rate—below 9,000 per US$--is too strong and makes difficulties for exporters. “The current rate (above 9,000 per US$) is still in a healthy range,” he said.

Padjar, Muchtar W, and Reze M
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