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.