New assault on rupiah

Just as everyone thought the currency crisis was easing, the rupiah has come under another massive attack since last week. Unlike the first bout in August and early September, this time around, the plunge drew fewer comments, and even less actions or responses, from the monetary authority which has stuck rigidly to its non-interventionist policy.

One day after another, the rupiah hit new record lows against the dollar these past few days. Although it rallied back each time after it fell to the lowest level, the rupiah's exchange rate still closed lower than its opening each day. On Friday, it touched the new historic low of Rp 3,725 before closing at Rp 3,650 to the dollar. Yesterday, the rupiah dropped even lower to Rp 3,850 before closing at Rp 3,710.

There was no doubt about where the rupiah had been heading this past week: down. The only question that we asked each day was how fast it was going to fall. The rupiah appeared to have fallen into a dark pit. Everyone knows there is a bottom, but nobody knows where it is, and we ask each day if it has reached that bottom.

When the first currency crisis ebbed in mid-September, most people had assumed that the rupiah was settling at a range of Rp 2,900 to Rp 3,000 to the dollar. They believed the rupiah had found its equilibrium as determined by the market, by supply and demand forces, and by the fundamentals of the economy. This turned out to be an optimistic assumption, and the renewed rupiah plunge brings into question our views of those fundamentals.

The latest plunge indicated that local demand for dollars continued. It would have been too simple to blame speculators. Some of the demand came from importers to hedge against further drops in rupiah. Exporters of manufactured goods were also active in the market given that many of them depend heavily on imported raw materials and components. Some local companies were buying dollars to pay for their offshore loans. At the rate the rupiah was falling last week, ordinary savers could soon join -- if they have not already done so -- in the rush toward dollars to protect their savings.

The government, in this case the monetary authority, has been tightlipped throughout most of last week as the rupiah came under renewed pressure. Understandably, the government is in a very difficult position, and its policy options appear to be fewer and far between. Officials knew that even the slightest of gestures or comments could have deepened the crisis.

The government's traditional tool in such a currency crisis -- raising deposit rates to make rupiah attractive -- has been ruled out given that many banks are reportedly facing severe liquidity problems after the credit crunch of last August. The government cannot attack the speculators at their own game by buying rupiah without risking its already depleted foreign currency reserves.

The economy is heading toward a very difficult time: a weak currency, low interest rates, a battered stock market, a strong inflationary pressure, and almost certainly, a lower growth rate. These are signs of a recession although no official is willing to publicly admit this much.

To be fair, the government has done almost everything in its power in dealing with the crisis. Many of its responses this past one-and-a-half months have won praises from international lending agencies: from the decision to float the rupiah, and the shelving of huge and costly government projects, to the new economic deregulation package announced in early September.

It remains to be seen whether the introduction of foreign currency swaps and forward purchase arrangements by Bank Indonesia on Friday were enough to deter more dollar buying. Given the current negative market sentiments, one suspects that these facilities would have limited impact, or would take time before they could influence traders, exporters and importers.

While the government's options are limited, inaction or silence, as we saw last week, were not among them.

Confidence in the rupiah needs to be shored up, and the market could not, or should not, be expected to do that job by itself. The market, and the public, are waiting for some actions, or at least some signals of imminent action, from the government to regain their confidence in the currency, and the economy.