Has the IMF reform package failed?

Has the IMF reform package failed?

Indonesia has implemented the International Monetary Fund
reform package but the value of its currency continues falling.
Economist Kwik Kian Gie discusses the reason behind the rupiah's
decline.

Question: The value of the rupiah fell to Rp 4,020 against the
U.S. dollar on Friday in spite of the IMF package. What is your
comment?

Answer: The IMF reform package has failed to help stabilize the
rupiah's value. When the rupiah originally fell to Rp 4,000 per
dollar the government was desperate and lost confidence in
whether it would be able to overcome the monetary crisis and
economic troubles and it, therefore, sought assistance from the
IMF. Now the psychological barrier of Rp 4,000 per dollar has
been passed five weeks after the IMF package was announced.

Soon after the government and the IMF announced their
agreement on Oct. 31, the rupiah strengthened to Rp 3,200. But,
in spite of Bank Indonesia's market intervention everyday, it has
since steadily declined to Rp 4,020 on Friday. In the coming
days, the exchange rate will probably be regarded as normal if it
hovers at around Rp 4,000 per dollar.

Q: You said Bank Indonesia intervenes in the market everyday. Why
doesn't the intervention help?

A: Bank Indonesia itself has never explained its market
intervention. We know of it only from press reports and bulletins
distributed by big banks to their clients. Only after being
queried by members of the House of Representatives, did Bank
Indonesia Governor Soedradjad Djiwandono admit that the central
bank had intervened. But he hastily explained that the
intervention was not aimed at defending the rupiah at a certain
level, but in preventing the value from declining excessively.

Q: Does it mean that the central bank should stop intervening?

A: Minister of Finance Mar'ie Muhammad recently said in Kuala
Lumpur the government would no longer intervene in the market.
But newspapers still reported that Bank Indonesia was continuing
to intervene in the market to prevent the rupiah from surpassing
the Rp 4,000 level. So there was confusion between the minister's
statement and the action of the central bank.

Q: What is the rupiah's fate if there is no intervention?

A: Nobody knows. What is clear is that the public need not expect
too much from market intervention because it clearly does not
help. The important thing is getting an estimate on a proper
conversion rate for the rupiah.

The calculation of purchasing power parity (PPP) by The
Economist shows that the rupiah should have been worth Rp 1,818,
implying that the rupiah is now undervalued.

Q: Isn't the PPP calculation too simple?

A: Yes. The Economist itself admits it.

Suppose we correct the figure Rp 1,818 and replace it with Rp
2,400 per dollar, a conversion rate of Rp 4,000 means that the
rupiah is still undervalued by 67 percent.

Q: How can the PPP and the real conversion rate deviate so much?

A: Because there are two other factors that influence the
rupiah's value -- the psychological and demand factors.

The psychological factor indicates that people do not believe
in rupiah's stability. They believe that the rupiah will continue
falling and they hastily buy dollars. The demand factor shows
that the demand for dollars is higher than supply.

Q: To help reduce demand, big businesspeople, accompanied by the
Minister of Finance, are going abroad to ask for their foreign
debts to be rolled over. Will this really help?

A: Maybe it will help a little. Businessman Sofjan Wanandi has
said that foreign creditors would not likely confiscate their
collaterals and opt to roll over their loans.

I don't think that it is necessary for Indonesian borrowers to
go abroad together on a road show. Just fax letters saying: "We
cannot repay our debts, what do you suggest we do?"

Q: What would be the impact if Indonesian borrowers do this?

A: Whether such defaults are accompanied by long explanations or
rough confrontation, the impact will be the same -- no foreign
investments will enter Indonesia for a long period of time and
Indonesia's country risk will increase sharply.

Q: How long will foreign investors stay away from Indonesia?

A: At least for two to three years.

But in any case, the country's balance of payments will be
under pressure and foreign exchange reserves will run low. The
government, therefore, is likely to use the $30 billion aid from
the IMF and bilateral arrangements to deal with the current
account deficit.

Q: Doesn't that mean that everything will be solved?

A: Not really. By using the $30 billion, Indonesia's foreign debt
will increase by that much and the savings-investment gap will
expand. So, the gamble for Indonesia is whether or not it will be
able to eradicate corruption, collusion and nepotism.