Indonesia Mulls Euro as Trade Currency

INDONESIA is considering using the euro as its currency of trade so as to lessen its dependence on the US dollar, a senior government official has told BT.

Mahendra Siregar, a senior aide to Chief Economics Minister Dorodjatun Kuntoro-Jakti, said the idea originated from state oil and gas company Pertamina, which is concerned about the volatility of the US dollar and its poor medium-term outlook.

Following Iraq's move to adopt the euro for transactions, Pertamina is looking at following suit. If Pertamina were to switch to the euro, this could open up possibilities for many other export-oriented sectors.

Mr Siregar said there has been no official change to Indonesia's policy of using the US dollar, but many institutions are studying the idea. Although it is being actively debated within the government, 'we are not yet at a stage of making a decision', he said. But he noted that government institutions and state-owned companies are free to make their own decisions without a Cabinet directive.

BT understands that the central bank has also been slowly converting some of its reserves, estimated at US$33 billion, into euros.

Although Bank Indonesia has not released any information on the subject, market sources say as much as 15 per cent of the reserves are now held in euros.

The idea of switching to the euro was mooted by Finance Minister Budiono last month when he said the euro was becoming more attractive as a currency than the US dollar given the latter's continued weakness. He added that although the dollar is still by far the dominant currency, the euro could emerge as a future rival.

His comments quickly took hold among several economists, including former top economics minister Rizal Ramli, who said the decision to switch should have been made some time ago.

But given that 70 per cent of Indonesia's trade is conducted in dollars and its huge foreign debt is denominated in dollars, it is unlikely that the country could make the switch easily.

'The idea of not being 100 per cent dependent on one currency is good but it is not the right time and until we have sorted out our borrowings, it will be seen as being a politically driven move,' said a local banker.

Since Indonesia's US$70 billion debt is denominated in dollars, the country would face an enormous exchange risk if it switched to the euro for international transactions, he noted.

Further, the domestic banking system is also largely denominated in US dollars, so few banks would be supportive of switching to another currency. And unless demand for the euro grows rapidly, the dollar looks like maintaining its No 1 position for the time being.