The credit crunch<\/p>\n
It is still too early to gauge whether the value of the
\nrupiah, against the American dollar, has finally bottomed out.
\nTrue, the speculative attacks on the currency are no longer as
\nfierce or massive as those witnessed during the first three weeks
\nof this month. And the rupiah has been fairly stable at a range
\nof 2,750 to 2,850 over the past four days.<\/p>\n
But this range cannot be immediately accepted as a sustainable
\nmarket rate because it has, so far, been greatly supported by
\neconomically punitive interest rates.<\/p>\n
The rupiah has not yet been subjected to the normal market
\ntest, meaning that the economically unacceptable, high interest
\nrates have yet to undergo gradual lowering. At the present
\ninterest rates of 28 percent to 30 percent, for Bank Indonesia's
\nshort-term certificates (one to three month maturity), it is
\nobviously much more profitable to invest money in rupiah papers
\nrather then holding dollar positions.<\/p>\n
This, we think, is the dilemma being faced by the monetary
\nauthorities. They are apparently not sure whether the range of
\nthe rupiah rate over the past few days is sustainable in a market
\nwith lower interest rates.<\/p>\n
On the other hand, though, the longer the credit crunch is
\nmaintained, the greater the cost to the long-term foundations of
\nthe economy. Most businesses, including banks, have been crying
\nout for relief from the high interest rates. Several businesses
\nhave even hinted at being on the brink of collapsing. Investor
\nconfidence in the long-term prospects of the economy are bound to
\nbe seriously damaged if the Jakarta Stock Exchange, which already
\nlost about 23 percent in market capitalization, continues to be
\ndepressed by the higher interest rates.<\/p>\n
The businesspeople's complaints are legitimate. Sensible
\npeople, who have a disposable income or own some savings, will
\nnot risk their money in businesses when they can sleep and still
\nearn 28 percent to 30 percent in interest without any risks.
\nMoreover, no business can compete in the market if its capital
\ncosts amount to more than 2.5 percent a month.<\/p>\n
Businesses also are finding it impossible to operate normally
\nwith the rupiah rate fluctuating wildly. As they cannot make any
\nreasonable calculations, they are not able to negotiate any
\ndeals.<\/p>\n
The central bank therefore should consider lowering the
\ninterest rates in a gradual manner to allow the rupiah to settle
\nat a sustainable market rate. The sooner the rupiah rate settles,
\nthe smaller the cost of \"shock-therapy\" being used to cope with
\nthe currency crisis. It is not unthinkable that a long credit
\nsqueeze would lead to a banking crisis with equally devastating
\nimplications for the whole economy.<\/p>\n
There are now two major challenges facing businesspeople.
\nFirst, they have to adjust to a new market reality whereby the
\nrupiah rate no longer develops within the band, once set and
\nprotected by the central bank, but according to the market
\nforces. While this adjustment is already a very taxing one, they
\nare also required to start adjusting their prices according to
\nthe new rupiah rate. It is unlikely the rupiah will return to the
\n2,378 to 2,682 band which was set by the central bank in early
\nJuly.<\/p>\n
We believe businesspeople have now accepted that they must
\nlive with a wider trading range. What they urgently need, to
\nenable them to operate normally with reasonably calculated risks,
\nis a reasonably stable range. After all, even before the rupiah
\nfloating, businesses had become accustomed to calculations with a
\n12 percent fluctuation in the rupiah rate. The difference now is
\nthat the range of the rupiah rate is no longer protected by the
\ncentral bank but is based largely on the market forces.<\/p>\n
The monetary authorities could help businesses survive the
\npainful adjustment by creating a more conducive climate for the
\nmarket to determine a sustainable range for the rupiah rate. We
\ndo not think the rupiah will be able to settle at a sustainable
\nmarket rate if the current credit crunch and astronomically high
\ninterest rates are maintained. The high interest rates at present
\nare only creating an artificial rate for the rupiah.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/the-credit-crunch-1447893297",
"image": ""
},
"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
}