An expat's view on crisis

An expat's view on crisis

Why do we have a worse problem in Indonesia than in the
neighboring countries? Allow an amateur economist to present a
condensed answer.

Three different problems struck us at the same time. A long-
pent-up devaluation pressure, a shaky banking system and a
political credibility problem. The total effect of these was too
much for an economy to stand.

We had the last devaluation in September 1986, when the rupiah
went to Rp 1,200 on the U.S. dollar. During the following 11
years, Bank Indonesia, on instructions from the government, kept
the rupiah at an approximately 4 percent annual slide against the
dollar, while real inflation was about 11 percent to 12 percent
per year (government figures were 8 percent to 10 percent). Give
a few percent for inflation in the U.S., and we had an
approximately 5 percent annual over-valuation of the rupiah.

So, in July 1997, when the rupiah reached Rp 2,500 to the
dollar, it should have been about Rp 4,400, -- i.e. over 40
percent lower than it was. If the economy would have been allowed
to adapt slowly to its real value, this would not have been any
problem. But then the government could not have shown four-digit
dollar-term GNP figures -- for a short moment. Political mistake
No. 1.

Then we had allowed our banking system to get out of control,
about as badly as that of Thailand. Political mistake No. 2. So,
we took another 40 percent devaluation in tune with the regional
upheaval, which bring us to about Rp 7,300 to the dollar.

This was necessary anyway to protect Indonesia's
competitiveness within ASEAN. Anything above Rp 7,500 can be seen
as a measure of the markets' distrust of the political situation,
and it varies from day to day. Political problem No. 3. Only in
this area, it might be relevant to talk about "speculation".

Therefore any CBS level at less than Rp 7,000 to the dollar
would appear to be self-deception even with a perfectly credible
government. If the government pegs the rupiah at, or below Rp
7,000 to Rp 7,500, that will be a godsend chance for everybody to
get rid of their last rupiah. The country may effectively switch
to a black market dollar economy, which probably will prevail far
into the future. Well beyond the Big Bang when the CBS crashes.

Which brings me to the whole point of this exercise, to arrive
at an estimation of a "healthy" level for the rupiah. Using the
logic above, my result is about Rp 7,000 to the dollar, nota bene
with a credible and stable government and no Chinese exodus.

HENRIK NYQVIST

Jakarta