Rupiah floatation 'worsens the crisis'<\/p>\n
JAKARTA (JP): Former Bank Indonesia (BI) governor J.
\nSoedradjad Djiwandono admitted yesterday that the central bank's
\ndecision to free float the rupiah last August led to a deeper
\neconomic crisis than the authorities predicted.<\/p>\n
He explained that the rupiah's flotation and the monetary
\ntightening that followed failed to curb the fall in the rupiah,
\nand instead caused the banking sector to start suffering and some
\nbanks even experienced runs by depositors.<\/p>\n
\"After some time the real sector started to feel the impact
\nsince banks reduced lending and lending rates rose dramatically,\"
\nhe said in a statement titled: The rupiah -- one year after the
\nfloat, delivered at a luncheon organized by the Indonesia-
\nAustralia Business Council.<\/p>\n
The currency shocks that began in July led to banking sector
\ndistress and finally resulted in what has been a total year-long
\neconomic crisis.<\/p>\n
Soedradjad said that the central bank's initial responses to
\nthe rupiah crisis failed to work because confidence was
\nevaporating in the region.<\/p>\n
\"Confidence is very difficult to describe. We only know how
\ncrucial it is when we do not have it. When confidence is present
\nthe market is not very demanding. However when it is lost,
\neverything we do is not good enough,\" he told foreign and local
\nbusinessmen, including IABC president Sabam Siagian.<\/p>\n
He pointed out that according to the Institute of
\nInternational Finance, capital outflows in 1997 from crisis-hit
\ncountries including Indonesia, Thailand, and South Korea totaled
\nUS$12 billion, compared to $93 billion in capital inflow in 1996.<\/p>\n
The foreign market players decided to shift their investment
\nfrom the region after observing weaknesses in its economic
\nstructures -- the result of crony capitalism and the prevalent
\nweak financial system, he explained.<\/p>\n
\"A completely different reaction came from the market (on BI's
\nmoves),\" he said.<\/p>\n
Soedradjad was BI governor when the rupiah crisis started in
\nJuly 1997, and was fired by ex-president Soeharto in February,
\ntwo weeks before the end of his term of office.<\/p>\n
The market's negative reaction started prior to the August 14
\nrupiah flotation when BI widened the rupiah intervention band
\nfrom 8 percent to 12 percent in an effort to ease pressure on the
\nrupiah resulting from the contagion effect from the devaluation
\nof the Thai baht.<\/p>\n
Every time the central bank intervention bands were widened
\n(five times between 1994 and 1997) an appreciation of the rupiah
\nusually followed, he explained.<\/p>\n
\"But the last band widening instead caused the rupiah to
\nrapidly depreciate,\" he said, adding that due to the failure of
\nthe managed floating system BI embarked on the free floating
\nsystem.<\/p>\n
He also said that the closing down of 16 banks in November was
\ninitially welcomed by foreign market players as reflected in the
\nstrengthening of the rupiah from Rp 3,900 to Rp 3,200 to the U.S.
\ndollar.<\/p>\n
\"But it lasted only for 10 days because the foreigners also
\nstarted to have doubts after the domestic market gave a negative
\nreaction to the bank liquidations,\" Soedradjad said, adding that
\nthe bank liquidations eventually resulted in the collapse of the
\nbanking sector.<\/p>\n
\"Theoretically closing down insolvent banks should stop the
\nbleeding in the sector, but we got a lesson that you should not
\nclose down banks when confidence is fragile,\" he said.<\/p>\n
The government last week announced four of the six troubled
\nbanks under the Indonesian Bank Restructuring Agency (IBRA) were
\ninsolvent. Some analysts have urged the government to
\nimmediately liquidate the banks to restore confidence in the
\nsector.<\/p>\n
Soedradjad urged the administration of President B.J. Habibie
\nto restore market confidence to enable its crisis-handling
\nprograms to work.<\/p>\n
He said that the confidence was essential to create a positive
\nperception, which had not emerged yet, to stimulate a positive
\nresponse from the market.<\/p>\n
\"When confidence is lost we can't do anything. But when
\nconfidence is there we can do wonders,\" he said.<\/p>\n
He explained that although habibie had made some progress in
\naddressing pressing problems, the market was still adopting a
\nwait-and-see attitude and refused to act positively.<\/p>\n
\"The turnaround has to be produced by the government by
\nshowing the market how it must view the whole problems and that
\nthere is a credible program been implemented,\" he said.<\/p>\n
\"The most important thing is to change the wait-and-see
\nattitude to become positive. After that, with consistent
\nimplementation of the program, plus hopefully a touch of luck,
\nthe long path toward a recovery can be assured,\" he said. (rei)<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/rupiah-floatation-worsens-the-crisis-1447893297",
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