Jitters about rupiah<\/p>\n
Understandably Indonesian monetary officials were painfully
\nsurprised by the dumping of the rupiah over the last few days.
\nThis was mostly because the trend occurred so soon after the
\nunveiling of what domestic and foreign economists have welcomed
\nas a very realistic state budget proposal with prudent fiscal and
\nmonetary targets.<\/p>\n
The new wave of currency speculation seems strange indeed.
\nAfter all, besides all the economic fundamentals being diagnosed
\nas sound and the fact that the economy is predicted to post
\nanother robust growth of at least 6.7 percent this year, it has
\nnow been almost two years since such speculative attacks on the
\nrupiah.<\/p>\n
The more regrettable is the anomaly because this time the
\nrumor mill and the new wave of currency speculation on the rupiah
\nwere partially motivated by a completely unexpected factor --
\nMexico's financial chaos caused by the Dec. 20 devaluation of its
\npeso by 15 percent. The monetary officials, therefore, were again
\ncaught in the position, which they have always avoided as much as
\npossible, of having to douse rumors about an impending
\ndevaluation and to defend the rupiah in the financial market. In
\nthe past the situation was such that the more they talked, or the
\nstronger was their denial of rumors about such a drastic monetary
\nmeasure, the more jittery were speculators about the rupiah rate.
\nThat, we think, was the lingering impact of the distrust sown by
\nthe manner in which the government decided on the rupiah
\ndevaluation in September 1986.<\/p>\n
This time, however, we fully share analysts' views that
\njudging from the political and economic situation today, the run
\nfrom the rupiah is baseless. It is indeed completely irrational
\nand irrelevant for foreign investors and bankers to draw gloomy
\nconclusions from their experiences in Mexico about a similarly
\nshaky economic and monetary condition in Indonesia. In so far as
\nthe potential sources of a currency crisis is concerned, the only
\nsimilarity both countries have lies in the large amounts of debts
\nthey owe to foreign creditors. In fact, as Coordinating Minister
\nfor Economic and Financial Affairs Saleh Afiff and Minister of
\nFinance Mar'ie Muhammad emphasized on Thursday and Friday,
\nIndonesia and Mexico are basically different in terms of the most
\nimportant factors.<\/p>\n
First, Indonesia's current account deficit, though estimated
\nto increase from $3.5 billion to $4.1 billion by March next year,
\nis only about 2.3 percent of its gross domestic product, compared
\nto Mexico's deficit of as high as eight percent of its GDP.<\/p>\n
Also, the bulk of Indonesia's external deficit has always been
\nfinanced by official soft-term borrowings and foreign direct
\ninvestment, whereas quite a portion of Mexico's deficit has been
\ncovered by flighty portfolio investment, which is highly
\nvulnerable to monthly or even weekly market fluctuations.<\/p>\n
Second, the central bank has loosened what it calls its
\nmanaged floating of the rupiah, thereby allowing the rupiah
\nexchange rate to move within a more realistic range which, given
\nthe country's inflation of almost 10 percent over the last two
\nyears, means gradual depreciation against major international
\ncurrencies, notably the U.S. dollar and the yen.<\/p>\n
Third, the government's mix of fiscal and monetary policy has
\nbeen hailed by analysts as prudent because of the mere 2.5
\npercent (in real terms) increase planned in the coming state
\nbudget, the cautious monetary targets of 20 percent expansion of
\neconomic liquidity and the 19 percent increase in total bank
\nlending and the conservative estimate of the international oil
\nprices at an average of $16.5 per barrel for projecting oil tax
\nrevenues.<\/p>\n
Fourth, the government's strong determination to check this
\nyear's inflation at a maximum of six percent, to control foreign
\nborrowings by the private sector and to curb import growth at 16
\npercent, despite the fact that the foreign reserve holding of
\nmore than $13.7 billion, which is equivalent to five months of
\nimports, will further minimize the risk of having to resort to
\ndrastic and bitter monetary measures.<\/p>\n
Finally, it is obviously completely against economic common
\nsense at this point in time for the government to devalue the
\nrupiah because most of the country's foreign debts of almost $100
\nbillion are denominated in the U.S. dollar and the Japanese yen
\nand the foreign debt service ratio against exports already
\nexceeds 30 percent. Moreover, such a one-shot devaluation would
\ncause chaotic instability which would severely damage the
\nconfidence in the economy of the foreign and domestic investors
\nwho are now the locomotives of growth.<\/p>\n
It is nonetheless unwise for us to simply argue over and over
\nagain that our situation is basically different from that of
\nMexico. We should instead use Mexico's economic chaos as another
\nreminder to keep us constantly on our toes. The government should
\nminimize the inconsistencies which still often occur within its
\npronounced fiscal and monetary policies. And the private sector
\nshould be extra careful about new commercial borrowings. This is
\nbecause in spite of our generally sound economic fundamentals,
\nour margin of safety from errors is actually rather thin.<\/p>",
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