SCENARIOS-Indonesia policy makers battle rupiah slump

By Ed Davies

JAKARTA, Dec 4 (Reuters) - Indonesian policymakers have been scrambling to avert a potential currency crisis since the rupiah IDR= hit a decade low last month. Thursday's moderate interest rate cut that contrasted with aggressive cuts elsewhere, underscored their caution.

Southeast Asia's economy is now in much better shape than a decade ago, when the Asian financial crisis ravaged the indebted corporate sector and gross domestic product shrank 13 percent in 1998.

The government's debt-to-GDP ratio now stands a healthy 40 percent of GDP compared with around 100 percent in 2000.

While markets respect the country's current top economic team -- Finance Minister Sri Mulyani Indrawati and Bank Indonesia Governor Boediono -- they have their work cut out for them in the current volatile global environment.

Here are some possible scenarios and policy options:

CENTRAL BANK INTERVENTION

The central bank has repeatedly intervened to support the rupiah, the second-worse performing currency in Asia this year with a 22 percent fall against the dollar, although this has only slowed the fall while driving down the country's foreign exchange reserves about 12 percent this year to just over $50 billion, according to the latest data. On Thursday the central bank said "it will always be in the market," to stabilise the rupiah.

FOREX RESTRICTIONS

The central bank said on Nov. 13 that foreign exchange purchases above an equivalent of $100,000 per month must be supported by underlying transactions. It later imposed a limit on sales of structured financial products by commercial banks.

Authorities also plan to order energy contractors to deposit billions of dollars earmarked for projects in local banks.

MONETARY POLICY

Unlike many banks around the world, Indonesia's central bank has held back with cutting rates even after the global financial crisis deepened in September, seeking to maintain a healthy premium over the U.S. Fed funds to support the rupiah.

It trimmed its benchmark rate by a quarter percentage point to 9.25 percent on Thursday, its first cut in a year, to help Southeast Asia's biggest economy cope with the global downturn. [ID:nJAK61417]

LIFT INFRASTRUCTURE SPENDING

Authorities could speed up infrastructure spending on projects from roads to ports, although ambitious plans seem to have often been held up by land ownership disputes.

GUARANTEE BANK DEPOSITS

Most analysts do not foresee widespread problems in Indonesia's banking system, which had to be rescued in a multi-billion dollar bailout after the Asian crisis. Authorities, however, have pledged greater scrutiny after a small lender PT Bank Century Tbk (BCIC.JK) was taken over by the government.

Indonesia recently moved to guarantee up to 2 billion rupiah in bank deposits, up from 100 million rupiah previously, although there have been some calls for guarantees on all deposits.

BORROWING, IMF

Indonesia has approached Australia, Japan, the World Bank and other official agencies to line up credit to help cover a projected $4.4 billion budget deficit next year as financial turmoil makes it hard to secure loans or sell bonds.

It could also consider accessing an $80 billion currency swap pool called the Chiang Mai Initiative set up by 13 Asian nations or the International Monetary Fund's special Short-term Lending Facility, although the latter may be politically hard to swallow.

Once approved, the IMF facility, which is different from a rescue package and is unconditional, could allow Indonesia to tap up to $15 billion, analysts said.

Indonesia remains scarred, however, by the image of former IMF chief Michel Camdessus looking on, arms folded, as Indonesian leader Suharto signed an austerity package in return for an emergency IMF loan during the 1997/1998 crisis.

OUT AND OUT CAPITAL CONTROLS Probably a last resort, particularly under the current economic team, who have been strong free market proponents.

Nonetheless, a very sharp slide in the rupiah could result in pressure from business interests on authorities to take stronger steps to cushion the blow on troubled companies.

Such a move would discourage foreign investment.

Some investors were spooked after authorities shut the stock market for three days last month after a dive in shares of the Bakrie group amid concerns over the its financial health.

The group is owned by the family of chief welfare minister Aburizal Bakrie and local media reported that the finance minister threatened to resign over alleged political interference to prop up shares in coal miner Bumi Resources, a Bakrie company.

The government denied the reports.

(Additional reporting by Tyagita Silka and Gde Arka Anugrah; Editing by Tomasz Janowski)