Investors' return needed to boost rupiah

Investors' return needed to boost rupiah

Despite an economic reform package, the rupiah's value has
continued to nosedive. Economist Sri Mulyani Indrawati of the
University of Indonesia discusses the recent monetary
development.

Question: Why does the rupiah continue its dive?

Sri: The rupiah fell further due to both economic and
political factors.

Speculative buying of U.S. dollars before Aug. 14 was driven
by people looking to gain profits after they realized that the
economic system was unable to cope with external pressures. After
Aug. 14, the rush for dollars continued because people were still
in the process of adjusting themselves to the flexible exchange
rates regime adopted by the central bank.

The rush for dollars in the past two weeks was caused by
noneconomic factors. Rumors on the health of President Soeharto
in two days alone, for example, dragged down the rupiah's value
against the dollar by about 1,000 points. Statements by military
officials also confused the public because they said they would
continue using forces to cope with the monetary problem. It was
really a mismatch in problem solving and we cannot blame the
public if they related the monetary crisis with politics.

Q: Does it mean that the reform package is not adequate?

S: The reform package itself is good and the government has
announced all the necessary measures -- including the liquidation
of insolvent banks and the tightening of liquidity supplies --
which are all in accordance with textbooks and in line with the
expectations of foreign investors.

But soon after the announcement, there were protests by the
owners of two liquidated banks and one of them was even able to
transfer its operations to another bank. There was also an
announcement that a huge oil refinery project worth US$3.2
billion would be started. All this indicated that Indonesia was
watering down the reform package.

The reform package seems good but it is really almost hollow.
That is why the reform has no leverage and the level of leverage
of a policy is related to the seriousness of the President and
his ministers to implement the policy.

So, we will probably see the rupiah's value remain weak until
March.

Q: Who are involved in foreign exchange speculations?

S: Those with surplus income. Who are they? Surely they are not
workers. Workers have no surplus of income because in Indonesia,
out of the profits obtained by companies from goods processing,
only 15 percent goes to workers. Another 70 percent goes to the
owners of capital and the rest is used to cover depreciation and
other costs.

Those with enough money are capital owners who have reinvested
part of their assets to establish new companies. Other people
with income surpluses include government officials who have
commercialized their positions -- through businesses, for
example. Such officials have been saving their money overseas.

Q: How much longer can the Indonesian public and companies
survive the economic crisis?

S: Indonesian individuals and families thus far have not felt
hard hit by the crisis because the companies they are working at
are putting a higher priority on the payment of wages than the
payment of debts and procurement expenses. But companies are now
facing liquidity problems and their cash flow may dry up in two
to three months.

Q: What can the government do to overcome the crisis?

S: The government has introduced all the necessary policies at
the macroeconomic level, such as a plan on a surplus budget, the
liquidation of insolvent banks and the adoption of a flexible
exchange rate system and the free foreign exchange regime.

President Soeharto has tried to implement a microeconomic
instrument through direct intervention in the use of the funds of
the state-owned social security company, PT Jamsostek, (for
housing credits and loans to small businesses) and the profits of
state-owned companies (for buying portfolio shares on the capital
market).

The government has yet to issue any constructive measures in
addition to these. But an economic consultant to the government,
Ali Wardhana, has indicated the government would maintain its
prudent policies on the macroeconomic level. Whoever will take
positions in the cabinet, therefore, will sustain such a
platform.

Q: What else can help the Indonesian economy?

S: The demand for dollars has been overshooting, while supplies
are drying up. Supplies of dollars traditionally come from
exporters and foreign investors, but some exporters have told me
that they save their dollars in the countries where they send
their goods to. Foreign investors have taken their capital out of
the country since the beginning of the crisis.

Now, what can help is the return of the investors. If leading
fund managers like JP Morgan, Merrill Lynch and Citibank (which
all have combined reserves similar to Bank Indonesia's, the
central bank), for example, return to make investments in
Indonesia, other fund managers and investors will follow suit.
(riz)