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