Hidden motive behind rupiah free-fall

Despite the government's announcement of reforms last week, the rupiah's value has continued to fall. Economist Kwik Kian Gie attempts to find out why.

JAKARTA (JP): The Council for Economic and Monetary Resilience headed by President Soeharto has enacted follow-up measures to ensure the implementation of the US$43 billion IMF-sponsored reinforced reform package.

The new decrees and rules indicate that the President is making an all-out effort to meet the IMF requirements although they seem go to against some of Indonesia's principles.

Take the decision to abolish almost all monopolies by the State Logistics Agency (Bulog) and the lifting of a ban on domestic retail trade by foreign companies as examples. When these policies were introduced, the government had the people's interest in mind. These policies however turned out to be ineffective. The new policies will have long consequences.

But the more urgent thing to discuss now is the fate of the rupiah. As soon as last week's announcement was made, the rupiah's value nose-dived. What else is President Soeharto expected to do? The rupiah's free fall can no longer be blamed solely on distortions in production and distribution, but also on the huge corporate debt.

The private sector's total foreign debts is put at $80 billion, consisting of $65 billion in debts from banks and another $15 billion in the form of securities. But, I think, none of the borrowers would be willing to repay their debts with the dollar's conversion rate at Rp 15,000 -- a 525 percent increase over the Rp 2,400 rate to which they signed their credit lease. Even if they sold their factories and other assets, the proceeds would never be enough to repay their dollar debts.

So, the surge of the dollar's value from Rp 10,000 to over Rp 15,000 even after the announcement of the reform-related decrees must have been caused by another reason since the debtors' default of their payments, which has hindered the inflow of foreign investment, has also reduced demand for the dollar.

Even if the borrowers used their debts to finance short-term working capital -- for consumer goods production or trade, for example -- they would not repay their debt principles to the creditors, but only the interest.

The debts would be rolled over again and again after upon maturity because they would continue using the fund for their next production and trade activities. The maturity dates were set merely to ensure that the money was used properly. Such debts have a self-liquidating character and offer mutual benefits because the borrowers, if financially healthy, would be able to repay their debt interest with their profits.

Of course, there were some borrowers who, out of greed, used all their debts to expand their business, so that their debts far exceeded their equities. But such borrowers would not repay their debts either when their maturity dates were due.

So, the media would be mistaken if it reported that the rupiah's free fall was caused by a rush on the dollar. The decline in the total volume of dollar-rupiah transactions -- with spot, today and tomorrow deliveries -- from an average of $1.5 billion last August to $463 million during the first nine days of this month, is evidence that no transactions were made by debtors who bought dollars to repay their debts.

I have started to suspect that there must be a party with a political motive which has intentionally been trying to damage the Indonesian economy because the rupiah's value fell further even after Soeharto issued positive signals in accordance with the IMF-sponsored reform measures. However, I am still blind as to who the party is and what its political goal may be.

The party responsible may have deposited some money, say $100 million, in a foreign bank in Singapore and then borrowed some rupiah cash from its branch office in Jakarta, using its Singapore deposit as collateral. This party, by using its rupiah cash, may have offered to buy dollars at a rate higher than the previously closed level, thereby triggering the dollar's value to increase on a particular day. The party might then use dollars to buy rupiah again in Singapore, with which it could buy dollars in Jakarta at a higher rate. These deals could lead to price movements on the market after being reported by Reuters.

Such an operation would be costly and the party responsible may have lost money from its operation even though its losses would not exceed its $100 million capital. So the question is who could it be? I am sure no individual would be willing to take such actions. But for a political group in a foreign country, which has certain political goals, such an operation would be far less expensive than the old-style operations of the CIA, which used to send personnel to kill targets in other countries. The recent development of sophisticated technology has made it easier and cheaper to destabilize someone who is in power.