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)