Jitters about rupiah

Jitters about rupiah

Understandably Indonesian monetary officials were painfully surprised by the dumping of the rupiah over the last few days. This was mostly because the trend occurred so soon after the unveiling of what domestic and foreign economists have welcomed as a very realistic state budget proposal with prudent fiscal and monetary targets.

The new wave of currency speculation seems strange indeed. After all, besides all the economic fundamentals being diagnosed as sound and the fact that the economy is predicted to post another robust growth of at least 6.7 percent this year, it has now been almost two years since such speculative attacks on the rupiah.

The more regrettable is the anomaly because this time the rumor mill and the new wave of currency speculation on the rupiah were partially motivated by a completely unexpected factor -- Mexico's financial chaos caused by the Dec. 20 devaluation of its peso by 15 percent. The monetary officials, therefore, were again caught in the position, which they have always avoided as much as possible, of having to douse rumors about an impending devaluation and to defend the rupiah in the financial market. In the past the situation was such that the more they talked, or the stronger was their denial of rumors about such a drastic monetary measure, the more jittery were speculators about the rupiah rate. That, we think, was the lingering impact of the distrust sown by the manner in which the government decided on the rupiah devaluation in September 1986.

This time, however, we fully share analysts' views that judging from the political and economic situation today, the run from the rupiah is baseless. It is indeed completely irrational and irrelevant for foreign investors and bankers to draw gloomy conclusions from their experiences in Mexico about a similarly shaky economic and monetary condition in Indonesia. In so far as the potential sources of a currency crisis is concerned, the only similarity both countries have lies in the large amounts of debts they owe to foreign creditors. In fact, as Coordinating Minister for Economic and Financial Affairs Saleh Afiff and Minister of Finance Mar'ie Muhammad emphasized on Thursday and Friday, Indonesia and Mexico are basically different in terms of the most important factors.

First, Indonesia's current account deficit, though estimated to increase from $3.5 billion to $4.1 billion by March next year, is only about 2.3 percent of its gross domestic product, compared to Mexico's deficit of as high as eight percent of its GDP.

Also, the bulk of Indonesia's external deficit has always been financed by official soft-term borrowings and foreign direct investment, whereas quite a portion of Mexico's deficit has been covered by flighty portfolio investment, which is highly vulnerable to monthly or even weekly market fluctuations.

Second, the central bank has loosened what it calls its managed floating of the rupiah, thereby allowing the rupiah exchange rate to move within a more realistic range which, given the country's inflation of almost 10 percent over the last two years, means gradual depreciation against major international currencies, notably the U.S. dollar and the yen.

Third, the government's mix of fiscal and monetary policy has been hailed by analysts as prudent because of the mere 2.5 percent (in real terms) increase planned in the coming state budget, the cautious monetary targets of 20 percent expansion of economic liquidity and the 19 percent increase in total bank lending and the conservative estimate of the international oil prices at an average of $16.5 per barrel for projecting oil tax revenues.

Fourth, the government's strong determination to check this year's inflation at a maximum of six percent, to control foreign borrowings by the private sector and to curb import growth at 16 percent, despite the fact that the foreign reserve holding of more than $13.7 billion, which is equivalent to five months of imports, will further minimize the risk of having to resort to drastic and bitter monetary measures.

Finally, it is obviously completely against economic common sense at this point in time for the government to devalue the rupiah because most of the country's foreign debts of almost $100 billion are denominated in the U.S. dollar and the Japanese yen and the foreign debt service ratio against exports already exceeds 30 percent. Moreover, such a one-shot devaluation would cause chaotic instability which would severely damage the confidence in the economy of the foreign and domestic investors who are now the locomotives of growth.

It is nonetheless unwise for us to simply argue over and over again that our situation is basically different from that of Mexico. We should instead use Mexico's economic chaos as another reminder to keep us constantly on our toes. The government should minimize the inconsistencies which still often occur within its pronounced fiscal and monetary policies. And the private sector should be extra careful about new commercial borrowings. This is because in spite of our generally sound economic fundamentals, our margin of safety from errors is actually rather thin.