Rupiah strengthening<\/p>\n
Neither the recent mysterious killing spree in East Java, nor
\nthe latest wave of student demonstrations in the capital has been
\nable to impede the rupiah's strong rebound that started last
\nmonth. The local currency has surged steadily, except for an
\naberration on Thursday last week when it tumbled to 7,750 from
\n7,150, wiping out almost 10 percent of the spectacular gain it
\nmade until the previous day because of a wrong signal from the
\ncountry's chief economics minister, Ginandjar Kartasasmita.<\/p>\n
The rupiah returned to a more stable range immediately after
\nGinandjar clarified his remarks and, more encouragingly, it did
\nnot fall back below 8,000, the level reached in the second week
\nof this month.<\/p>\n
At first glance it might seem that the rupiah's steady
\nappreciation since last month has been a natural phenomenon, the
\ncumulative impact of the incremental progress the government has
\nmade in many of its reform programs and the stronger vote of
\nconfidence from the International Monetary Fund (IMF) and
\ninternational sovereign donors. The recent robust appreciation of
\nthe yen against the dollar undoubtedly played its part but not a
\npivotal one because when the yen began to decline again early
\nlast week, the rupiah bucked the trend.<\/p>\n
This is, in the main, very good news indeed because, as we
\nhave repeatedly stressed in this column, a stable and reasonable
\nexchange rate is crucial to alleviating our economic woes. It is
\nnot an exaggeration to say that none of the reform measures are
\nlikely to be effective unless the currency recovers to a
\nsustainable market level.<\/p>\n
But it is highly debatable whether the pace of the rupiah's
\nstrengthening has been fully market-driven. Greatly encouraging
\nas it may seem, we nonetheless have a sense of foreboding that
\nthe recent appreciation was too great and too fast. The monetary
\nauthorities and most analysts also agree that too fast a rise in
\nthe rupiah's exchange rate without any marked improvement in the
\neconomic fundamentals will only fuel more speculation as market
\nplayers will consider it highly tenuous. Too high an appreciation
\nis also hurtful to the export industry.<\/p>\n
The pace of the appreciation seems to be highly speculative
\nand consequently highly vulnerable because there have not been
\nany dramatic decrease in the major economic, social and political
\nrisks that have so far weighed down on the rupiah.<\/p>\n
Moreover, the rupiah rate development has taken place in a
\nvery thin market where a position of a few million dollars could
\nhave a great influence. The fact is the government has of late
\nbeen converting millions of dollars daily out of the foreign aid
\nit got under the bail-out program into rupiah to finance its
\ncash-strapped budget and accelerate the safety net programs for
\nimpoverished people.<\/p>\n
It is also difficult to take the rupiah's movement as entirely
\nnatural when imports have collapsed and domestic debtors have
\nsimply stopped paying foreign debts, thereby depressing the
\ndemand for dollars to an abnormally low level. Failure to settle
\nthe US$64 billion debt overhang, of which $22 billion is due
\nbefore March, may see many debtors end up facing bankruptcy
\nproceedings. This may suddenly fuel a big demand for the
\ngreenback and consequently push down the rupiah.<\/p>\n
The massive bank restructuring program, which is scheduled to
\nbe completed later this year, is another soft spot for the rupiah
\nrebound. Any delay or snafu in this crucial program will halt the
\nrupiah's recovery because bank lending has virtually stopped
\nsince early this year.<\/p>\n
Yet another big vulnerability is the democratization process
\n-- a very complex issue given the economic crisis -- which will
\naccelerate in a big way in the upcoming special session of the
\nPeople's Assembly, to be followed by election campaigns possibly
\nin March and April, the House election in May or June and the
\npresidential election in December.<\/p>\n
It is therefore much better and more sustainable to have a
\ncreeping, but steadily appreciating rupiah, to allow for a
\ngradual lowering of the choking interest rates. Not a roller-
\ncoaster that makes it impossible to calculate risks. This
\ncondition therefore does not immediately allow any significant
\neasing in the conservative fiscal and monetary policies, let
\nalone a relaxation in the fully fledged implementation of the
\nreform programs agreed with the IMF.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/rupiah-strengthening-1447893297",
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"sponsor": "Okusi Associates",
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