The beleaguered rupiah<\/p>\n
Remember early January 1998 when the rupiah crashed through
\nthe 10,000-to-the-dollar barrier two days after then president
\nSoeharto unveiled his draft 1998-1999 budget? The four-fold fall
\nof the rupiah was then precipitated by what the market perceived
\nto be unrealistic budget proposals, which defied the urgent
\nimperatives for drastic reform and belt-tightening measures.<\/p>\n
What happened on Monday was by and large a similar phenomenon,
\nthough on a much smaller scale. The rupiah depreciated from Rp
\n9,985 on Friday to Rp 10,030 -- its lowest level in the past 41
\nmonths -- and the stock market fell 1.1 percent.<\/p>\n
However, the development here bucked the regional trend as
\nmost currencies and stock prices in other Asian markets firmed
\nup. The main cause of the bearish sentiment in Jakarta is the
\nmarket distrust in the draft 2006 budget that President Susilo
\nBambang Yudhoyono proposed to the House of Representatives last
\nTuesday as well as the uncertainty over policy direction.<\/p>\n
Chief economics minister Aburizal Bakrie has tended to
\ndownplay the rupiah decline, as he considers it simply the work
\nof market mechanisms. Since the rupiah is floated against a
\nbasket of currencies it is supposed to fluctuate.<\/p>\n
However, such a laid-back attitude is damaging the credibility
\nof the government because this negative sentiment, if allowed to
\nescalate, could turn into a self-fulfilling prophecy.<\/p>\n
Worse still, the new set of measures launched last month to
\nprevent speculative attacks on the rupiah has seemingly been
\nunable to beef up the rupiah. The government and Bank Indonesia
\nlast month launched joint arrangements whereby the central bank
\ndirectly supplies the foreign exchange needs of state oil and gas
\ncompany Pertamina for importing crude oil and oil products and
\nother state-owned companies to purchase dollars from designated
\nstate banks.<\/p>\n
But the rupiah has declined steadily this month even though
\nforeign exchange derivative transactions with foreign
\ncounterparts against the rupiah have been limited to a maximum
\nUS$1 million, down from a previous $3 million and dollar
\npurchases in outright forward transactions, swaps have been
\ncapped at $1 million and a three-month minimum investment hedging
\nperiod has been imposed on foreign exchange transactions.<\/p>\n
The key assumptions used by the government to construct its
\n2006 budget plan have been seen by most analysts and market
\nplayers as utterly unrealistic, causing market distrust in the
\ngovernment's fiscal management.<\/p>\n
The government's assumption of $40\/barrel as the average price
\nof oil for the whole of next year, compared to at least $55 as
\nforeseen by most analysts, has put the national budget at the
\nmercy of international oil-price volatility, thereby causing
\nuncertainty about the budget's fiscal sustainability and the
\nprospect of the country's balance of payments.<\/p>\n
The market is nervous that the government does not have much
\nleeway in managing its budget deficit, which will most likely be
\nmuch larger than the Rp 19.8 trillion envisaged in the draft
\nbudget, because the fuel subsidy expenditures will be much larger
\nthan the Rp 68.5 trillion as budgeted for next year.<\/p>\n
Even with such a low oil price projected for next year, the
\nbudget plan already requires the government to dip into its
\nsavings balance at Bank Indonesia, currently estimated at Rp 22
\ntrillion, and to raise another Rp 60 trillion through new bond
\nissues, divestment and asset sales. Where else can the government
\nget additional revenues to plug the big budget hole?<\/p>\n
The market is apprehensive that another bout of fuel-price
\nincreases is only a matter of time and stronger inflationary
\npressures will further push down the rupiah and force the central
\nbank to tighten the credit crunch. This is a lethal combination
\nfor the manufacturing industry as most factories still rely on
\nimported materials and components. But businesspeople are in the
\ndark about when and how these painful measures should be taken.<\/p>\n
This vicious cycle will surely increase the government's
\nburdens of servicing its foreign and domestic debts and this, in
\nturn, could cause the fiscal deficit to explode to an
\nunsustainable level, thereby raising the sovereign risks. Higher
\nsovereign risks would consequently increase the government bond
\nyields as investors, instead of buying new bond issues, would
\ndecrease their government bond portfolio.<\/p>\n
The government could be correct in its conclusion that the
\ncurrent rupiah rate developments were not truly reflective of the
\neconomic fundamentals. But it is entirely misguided for the
\ngovernment not to act immediately and firmly to address the
\nmarket apprehension because the steady fall in the rupiah rate
\nand its negative repercussions are affecting macroeconomic
\nstability and will eventually damage the economic fundamentals.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/the-beleaguered-rupiah-1447893297",
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