1997/98 Crisis: How Difficult Was It to Save the Rupiah from the 17,000 Level?

The rupiah exchange rate has now moved above the Rp17,000 per US dollar level. According to Refinitiv data, during intraday trading on Friday (10/4/2026), the rupiah exchange rate briefly breached its all-time weakest level against the US dollar at Rp17,115/US$, depreciating by around 0.21%. This level is not merely a psychological figure but also reminds us of one of the most challenging phases in Indonesia’s economic history, when pressure on the rupiah became a gateway to a larger crisis. Although the current situation differs from 1998, the rupiah’s weakening cannot be taken lightly. Past experiences show that exchange rate pressures can spread to various aspects, from inflation, import burdens, debt costs, to market participants’ confidence in the direction of national economic policies. Therefore, the current rupiah weakening cannot be read merely as daily volatility in the financial markets. There are important lessons from history indicating that when exchange rate pressures intensify, the government and central bank’s responses must be quick, measured, and consistent to prevent the weakening from developing into a deeper crisis. Learning from 1997-1998 Returning to the 1997-1998 period, when Asia was hit by a major financial crisis that quickly spread to various countries, including Indonesia. The financial crisis at that time was fundamentally characterised by four main issues, namely the scarcity of foreign exchange in Thailand, Indonesia, South Korea, and several other Asian countries, which caused exchange rates and stock markets to plummet sharply. In addition, the financial sector and capital allocation mechanisms in the affected countries were not yet sufficiently developed. The crisis also had a significant impact on the United States and the global economy, and prompted the involvement of the International Monetary Fund (IMF) in its handling. The magnitude of the Asian crisis’s impact at that time cannot be separated from the high exposure of international banking to the troubled countries. When economic pressures intensified in Asia, advanced countries also paid close attention to the risks faced by their financial sectors, especially because their major banks had large loans to Asian countries. At the end of 1996, US banks were recorded to have outstanding loans of US$29.1 billion to six Asian countries, namely Indonesia, South Korea, Malaysia, the Philippines, Taiwan, and Thailand. This outstanding value essentially depicts the total loans that are still ongoing and not yet repaid. Therefore, when the crisis began to emerge in Asia, advanced countries also worried about its impact on their financial sectors. The problem was that if the borrowing countries faced heavy pressure, their ability to repay debts was also threatened. Among the main lending countries, Japan was the largest with a total of around US96.3billiontothosesixcountries.ThishighfinancialinterconnectednessmadepressuresinAsiaquicklyspillovertotheforeignexchangemarkets.InIndonesia′scase, oneofthemostevidentimpactswasthenseenintheplungeoftherupiahexchangerate.Therupiah′sweakeningbecameoneoftheearlysymptomsthatthenopenedaseriesofmajorpressuresinthenationaleconomy.Atthattime, therupiahexchangeratewasataveryweaklevel, namelyRp16, 800/US. In fact, the conditions at that time were far more severe because the dollar surge happened very quickly in a short period. On 2 January 1997, the rupiah was still around Rp2,361/US.However, aboutoneandahalfyearslater, therupiahexchangeratefelltotouchRp15, 200/US. This means the Garuda currency depreciated by 543%. That movement showed how quickly the pressures in the financial markets at that time turned into much broader economic shocks. In a study from the Bulletin of Monetary Economics and Banking edition 1999, it was explained that entering the second semester of 1997, Indonesia’s economy began to face serious problems after foreign investors doubted the sustainability of the national external sector. The outflow of foreign capital at that time not only shook the financial markets but also pressured the economy broadly. Investment fell sharply, inflation surged, and the rupiah depreciated deeply. The study also emphasised that the government’s response at that time was not done partially, but through an integrated policy package covering monetary, fiscal, and sectoral policies. The direction of the policies pursued was monetary tightening and more cautious fiscal policies. “The policy responses taken to address the crisis constituted an integrated policy covering monetary, fiscal, and sectoral policies. In general, the policies pursued were the implementation of tight monetary policy and applying cautious fiscal policy, including reducing government spending expansion,” quoted from the Bulletin of Monetary Economics and Banking edition 1999. 1. Monetary Policy From the monetary side, the government and Bank Indonesia at that time sought to dampen exchange rate volatility with various tightening measures. Interventions were carried out both in the spot and forward markets. The government also once widened the exchange rate intervention band to 12%, before finally abolishing the intervention band on 14 August 1997 to make the rupiah more flexible in facing market pressures. Subsequently, Bank Indonesia tightened liquidity through open market operations. The purchase of bank SBPU was stopped, as was Facility Discount I and SBI Repo. However, because the pressure on the rupiah was still very strong, BI then raised the SBI intervention interest rate to 30% for a one-month tenor. As a result, the overnight interest rate in the interbank money market surged very high. When the pressure had not yet subsided, additional steps were taken to increase foreign exchange supplies and suppress foreign currency needs. Those efforts were carried out through