Indonesia: politics mar rupiah

The government''s seeming inability to come up with any credible solutions to Indonesia''s problems is thwarting the rupiah''s recovery.

Political uncertainty is taking its toll again on the rupiah. The Indonesian currency slid above the 9,000 level against the US dollar yesterday, notwithstanding the improvement seen in IndonesiaƆs economic fundamentals in recent months and the fact that the rupiah is currently deeply undervalued. Bank Indonesia, for instance, estimates fair value of the rupiah to be about 6,500 against the dollar. However, taking into account US-Indonesian inflation differentials since the last maxi-devaluation in 1986, the fair value of the rupiah in purchasing-power parity PPP terms could even be as low as 5,000 per US dollar, barring the usual measurement errors.

By all measures, the rupiah is heavily undervalued how long will it...

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