Hidden motive behind rupiah free-fall<\/p>\n
Despite the government's announcement of reforms last week,
\nthe rupiah's value has continued to fall. Economist Kwik Kian Gie
\nattempts to find out why.<\/p>\n
JAKARTA (JP): The Council for Economic and Monetary Resilience
\nheaded by President Soeharto has enacted follow-up measures to
\nensure the implementation of the US$43 billion IMF-sponsored
\nreinforced reform package.<\/p>\n
The new decrees and rules indicate that the President is
\nmaking an all-out effort to meet the IMF requirements although
\nthey seem go to against some of Indonesia's principles.<\/p>\n
Take the decision to abolish almost all monopolies by the
\nState Logistics Agency (Bulog) and the lifting of a ban on
\ndomestic retail trade by foreign companies as examples. When
\nthese policies were introduced, the government had the people's
\ninterest in mind. These policies however turned out to be
\nineffective. The new policies will have long consequences.<\/p>\n
But the more urgent thing to discuss now is the fate of the
\nrupiah. As soon as last week's announcement was made, the
\nrupiah's value nose-dived. What else is President Soeharto
\nexpected to do? The rupiah's free fall can no longer be blamed
\nsolely on distortions in production and distribution, but also on
\nthe huge corporate debt.<\/p>\n
The private sector's total foreign debts is put at $80
\nbillion, consisting of $65 billion in debts from banks and
\nanother $15 billion in the form of securities. But, I think, none
\nof the borrowers would be willing to repay their debts with the
\ndollar's conversion rate at Rp 15,000 -- a 525 percent increase
\nover the Rp 2,400 rate to which they signed their credit lease.
\nEven if they sold their factories and other assets, the proceeds
\nwould never be enough to repay their dollar debts.<\/p>\n
So, the surge of the dollar's value from Rp 10,000 to over Rp
\n15,000 even after the announcement of the reform-related decrees
\nmust have been caused by another reason since the debtors'
\ndefault of their payments, which has hindered the inflow of
\nforeign investment, has also reduced demand for the dollar.<\/p>\n
Even if the borrowers used their debts to finance short-term
\nworking capital -- for consumer goods production or trade, for
\nexample -- they would not repay their debt principles to the
\ncreditors, but only the interest.<\/p>\n
The debts would be rolled over again and again after upon
\nmaturity because they would continue using the fund for their
\nnext production and trade activities. The maturity dates were set
\nmerely to ensure that the money was used properly. Such debts
\nhave a self-liquidating character and offer mutual benefits
\nbecause the borrowers, if financially healthy, would be able to
\nrepay their debt interest with their profits.<\/p>\n
Of course, there were some borrowers who, out of greed, used
\nall their debts to expand their business, so that their debts far
\nexceeded their equities. But such borrowers would not repay their
\ndebts either when their maturity dates were due.<\/p>\n
So, the media would be mistaken if it reported that the
\nrupiah's free fall was caused by a rush on the dollar. The
\ndecline in the total volume of dollar-rupiah transactions -- with
\nspot, today and tomorrow deliveries -- from an average of $1.5
\nbillion last August to $463 million during the first nine days of
\nthis month, is evidence that no transactions were made by debtors
\nwho bought dollars to repay their debts.<\/p>\n
I have started to suspect that there must be a party with a
\npolitical motive which has intentionally been trying to damage
\nthe Indonesian economy because the rupiah's value fell further
\neven after Soeharto issued positive signals in accordance with
\nthe IMF-sponsored reform measures. However, I am still blind as
\nto who the party is and what its political goal may be.<\/p>\n
The party responsible may have deposited some money, say $100
\nmillion, in a foreign bank in Singapore and then borrowed some
\nrupiah cash from its branch office in Jakarta, using its
\nSingapore deposit as collateral. This party, by using its rupiah
\ncash, may have offered to buy dollars at a rate higher than the
\npreviously closed level, thereby triggering the dollar's value to
\nincrease on a particular day. The party might then use dollars to
\nbuy rupiah again in Singapore, with which it could buy dollars in
\nJakarta at a higher rate. These deals could lead to price
\nmovements on the market after being reported by Reuters.<\/p>\n
Such an operation would be costly and the party responsible
\nmay have lost money from its operation even though its losses
\nwould not exceed its $100 million capital. So the question is who
\ncould it be? I am sure no individual would be willing to take
\nsuch actions. But for a political group in a foreign country,
\nwhich has certain political goals, such an operation would be far
\nless expensive than the old-style operations of the CIA, which
\nused to send personnel to kill targets in other countries. The
\nrecent development of sophisticated technology has made it easier
\nand cheaper to destabilize someone who is in power.<\/p>",
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