A new reality
A new reality
With the local currency market still in the doldrums, many
people were obviously looking for comforting words and clues as
to future government policy on the issue from President
Soeharto's State of the Nation Address on Saturday.
No one knows for certain where the market is heading now after
Bank Indonesia floated the rupiah Thursday; and the impact on the
economy from the nearly 20 percent depreciation of the rupiah
against the dollar these past two weeks is not yet fully known.
But as an indication of things to come, prices of imported
consumer goods have already started rising.
President Soeharto, as expected, addressed the currency
problem in his speech. He described the fluctuations in the
rupiah's exchange rate as a new economic reality, something that
the nation, particularly the business community, should adjust
to. Indonesia is increasingly becoming more susceptible to the
negative excesses of an open economy, like the currency contagion
that has hit other Southeast Asian countries these past weeks.
Soeharto gave little away as to the government's immediate
plans, but it was comforting to hear that he sees the volatility
as temporary. With the right policy, he said, the rupiah should
settle at a new equilibrium. His optimism was founded on the
strong fundamentals of the Indonesian economy.
The economic figures, as presented in the speech, looked as
healthy as one could expect. Inflation in the year ending in
March was running at 5.2 percent, the growth of imports was
halved to 10.4 percent, and there were signs that export growth
is rebounding. Indonesia's current account deficit has been
growing at a slower rate, and the size of the deficit is still
among the lowest in the region. The country's foreign exchange
reserves are sufficient to finance more than five months of
import needs. Finally, Indonesia's economy grew by 7.98 percent
in calendar 1996, an upward revision from the earlier official
figure of 7.82 percent.
Soeharto tampered his optimism with caution in that
Indonesia's overall debt service ratio remains high, propped up
mainly by the rapid growth of private sector offshore borrowing.
His message is that the private sector should be more prudent in
deciding to take up new foreign loans.
It remains to be seen how quickly the nation will adjust to
the new reality. The government has already taken measures to
soften the blow, but whether they are sufficient is something
that only time will tell.
While there are reasons for optimism given the economy's
strong fundamentals, there can be no room for complacency
anymore. We recall that when the currency crisis attacked
Thailand, the Philippines and later Malaysia, some officials
smugly dismissed the likelihood of Indonesia being affected.
Events since then have proved they were too confident.
For now, Indonesia may have averted an even bigger crisis,
thanks to the strong economic fundamentals. But we cannot take
for granted that they will remain strong forever. This is
something that Indonesia must continue to work on as it adjusts
to the new reality of being an open economy.
The strongest message this crisis has sent is that as a fully-
fledge member of the global economy, Indonesia is subject to the
forces that determine the pace of the world's economic growth.
This means that all its economic policies must comply with the
internationally accepted rules of the game, if it is to survive
the fierce competition and reap the benefits of the expanding
global economy.
Unfortunately, this is a reality that has yet to fully sink in
in this country. The government appears to have slowed the pace
of its deregulation and debureaucratization drives. At times, it
even gives the impression of caving in to big business by
reverting back to its old practices of monopolies and
protectionism. We hope this impression, like the currency crisis,
will not last long.