Weakening fundamentals worsen rupiah free fall<\/p>\n
Riyadi Suparno, The Jakarta Post, Jakarta<\/p>\n
The rupiah's plunge over the past few weeks may not have spoiled
\nlast weekend's wedding party for President Susilo Bambang
\nYudhoyono's son, but it could eventually undermine his
\ngovernment.<\/p>\n
For most people, especially those in the middle class, the
\nrupiah's fall to over Rp 9,800 a dollar -- its lowest level since
\nMarch 2002 -- will likely serve as one more visible sign, after
\nthe fuel shortages, of the government's failure to meet their
\nneeds.<\/p>\n
Although the responsibility for guarding the rupiah lies more
\nwith Bank Indonesia, the government also shares responsibility
\nfor maintaining the stability of the rupiah.<\/p>\n
According to a special report on the rupiah by Standard
\nChartered Bank, the recent fall of the rupiah is not just a
\nmatter of an imbalance in the supply and demand of the dollar and
\nrupiah, but rather is the result of the country's weakening
\nfundamentals.<\/p>\n
This includes the deteriorating current account due to rising
\nimports as a result of increased domestic demand. The current
\naccount surplus is expected to drop to about US$2 billion this
\nyear from almost $2.9 billion last year and $8.1 billion in 2003.<\/p>\n
Another fundamental factor weighing on the rupiah is the
\ngovernment's suspension of the privatization program for state-
\nowned companies. Whereas president Megawati Soekarnoputri was
\nquick to sell state companies, President Susilo is taking a more
\ncautious approach to privatization. So far, very few dollars have
\nbeen raised from the privatization program under Susilo.<\/p>\n
As a result, the supply of dollars from trade and
\nprivatization has declined, thus providing little support for the
\nrupiah.<\/p>\n
The government seems to have expected this decline, and hopes
\nto compensate for it by increasing official capital flows as a
\nresult of multibillion foreign grants and loan commitments from
\ndonors to help rebuild Aceh following the tsunami.<\/p>\n
Foreign money for Aceh has indeed begun to trickle in, but
\nless than expected because of perceived problems of governance in
\nIndonesia.<\/p>\n
Despite the weak official capital flows, the government and
\nthe private sector had hoped for better private capital inflows
\nthis year following the $5 billion acquisition of the country's
\nsecond largest cigarette producer, HM Sampoerna, by Philip Morris
\nof the United States.<\/p>\n
Looking into the details of the acquisition, however, the
\nexpected dollars will not enter Indonesia any time soon.<\/p>\n
According to Standard Chartered Bank's report, the Sampoerna
\nfamily, who received $2 billion for its 40 percent stake in the
\ncigarette company, has not reinvested the money in Indonesia.
\nAlso, more than 70 percent of public investors who sold their
\nstake through a tender offer were foreigners, who may not hold on
\nto their rupiah. Last, Philip Morris funded the purchase partly
\nby borrowing rupiah onshore.<\/p>\n
Thus, the expected private flows have not yet materialized,
\nand consequently, no additional support is coming for the rupiah.<\/p>\n
This delicate situation has been worsened by rising crude oil
\nprices in the international market. As Indonesia becomes a net
\noil importer as a result of a lack of private investment in the
\noil sector, the government -- through state oil and gas company
\nPertamina -- has to fork out more dollars to import fuel to meet
\na quarter of the country's demand.<\/p>\n
While dollar support for the rupiah is slim, the dollar has
\nsuddenly strengthened globally as a result of rising interest
\nrates in the United States.<\/p>\n
On the other hand, the adjustment of local interest rates has
\nbeen too slow, compared to the rate increases in the United
\nStates. The U.S. Federal Reserve has raised its benchmark rate by
\n225 points to 3.25 percent per annum, while Bank Indonesia has
\nonly raised its benchmark rate by 90 points to 8.25 percent.<\/p>\n
As a result, people with excess liquidity have been dumping
\ntheir rupiah and rushing to the greenback.<\/p>\n
Given the situation, where the weakening of the rupiah has
\nbeen driven by both global factors -- the strengthening of the
\ndollar -- as well as weakening local fundamentals, the government
\nand Bank Indonesia must strengthen their cooperation to defend
\nthe rupiah.<\/p>\n
Bank Indonesia should continue to do its part by adjusting its
\ninterest rates so real interest rates -- interest rates adjusted
\nto inflation -- are positive, and by smartly intervening in the
\nmarket.<\/p>\n
To make the measures more effective, the government needs to
\ndo its part to help increase the supply of dollars in the market.<\/p>\n
The government should be commended for instructing state and
\nstate-owned companies to repatriate their dollars from offshore
\nto onshore banks. However, it is a challenge to persuade private
\nexporters to bring their dollar earnings back to the domestic
\nmarket.<\/p>\n
The government also needs to improve its governance to help
\nexpedite the disbursement of money for Aceh, and thus increase
\nthe dollar supply in the domestic market.<\/p>\n
But most importantly, both the government and the central
\nbanks need to take longer term measures to bring the rupiah to
\nthe desired level of Rp 9,000 per dollar by improving economic
\nfundamentals; especially better inflation management by the
\ncentral bank and sound fiscal policies by the government.<\/p>",
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"sponsor": "Okusi Associates",
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