Hidden motive behind rupiah free-fall

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.