Rumors are part of the finance sector

Rumors are part of the finance sector

Devaluation rumors resurfaced last week but the government
quickly warded them off. Why do such rumors keep coming back?
Noted economist Laksamana Sukardi talked to The Jakarta Post to
shed some light on the issue.

Question: Why do devaluation rumors come back over and over
again?

Answer: You have to see that in the finance industry, a rumor
is crucial. It is something where traders talk about
possibilities. Sometimes rumors even become very dominant.
But apart from that, the rupiah itself is a devaluation prone
currency. It seems to me there is a cycle, which began in 1986,
in which the rupiah was devalued every four to six years.

Q: What makes the rumor reemerge?

A: There are two main factors. The economic condition of the
country and the investor's destiny. Investors, for example, are
very jittery about investment portfolio in the stock market. It's
true there are a certain amount of capital gains they may get
from their shares. But once a devaluation occurs this capital
gain is meaningless. Sometimes their exchange loss is even bigger
than their capital gain.

Q: What is wrong with our economic condition? People believe
that there is nothing wrong with it.

A: It's true that our economic prospect, in the long term, is
good. Without doing anything, we can gain an economic growth of 6
percent a year. Why? Because we have proximity to Japan and other
new tigers. We have unlimited natural sources. And most of all,
we have a very good domestic market.

But we have to remember that we do have the characteristics
that seem to lead us to a devaluation decision. Our currency, for
example, is overvalued. Some of the indications are high
inflation, high interest rates and the big current account
deficit. Speculators know that a big current account deficit is
one factor that causes a currency devaluation. Our export amount
is far below the target. Even the export value of textile and
textile products, which have long been our main export commodity,
has declined sharply over the last three years. The same thing
has happened to plywood and other commodities. This means we
spend a lot on imports but our exports are stagnant.

Q: What is the point?

A: People see that the external deficit has exceeded the
tolerable point. Our deficit is over US$5 billion or about 3
percent of the gross national product, while the sustainable
level is 2 percent of the gross national product. A high deficit
is alright if the economic condition is stable. But, we don't
have such a condition.

Q: So, what is your suggestion to overcome such a problem?

A: I think it's about time for the central bank to intervene.
It's simply normal. It happens with other central banks like Bank
of Tokyo and Federal Reserve Bank. As I said, rumors are part of
the financial market. Sometimes a business decision is based more
on rumors than on economic fundamentals. This means market
reactions are dependent upon rumors. That is why intervention by
a central bank is necessary. If their business decisions were
based mainly on fundamentals then intervention would not be
possible.

By such intervention, a central bank can block particular
rumors. Once again, we cannot ignore rumors. We have to live with
them. Rumors will reemerge all the time. The question is, does
the central bank of Indonesia have the capability to make a
market intervention? I think it's the time for them to improve
their capability to do so.

Q: How would you do it?

A: They have to build up an adequate supply of dollars. They
have to prepare hard currency in the reserve bank. They also have
to ask for stand-by loans from banks overseas to anticipate the
market activity. In this case, you have to wear the investors'
shoes, not the authorities'. Money does not recognize
nationalism. A nationalistic approach is wrong. It's a mistake if
you still think that an appeal to nationalism will help. No. In
this global era, money will only settle where it feels safe and
comfortable.

Q: Other suggestions?

A: There is a certain relationship between rumors and
transparency. The more transparent you are the less rumors will
emerge. So, if you want to brush off rumors, you have to be
transparent. In my opinion, the Indonesian stock exchange is not
yet as transparent as those of America, Japan, Germany, Singapore
or Hong Kong. It's obvious that the rule of the game is
transparency. This is the rule of the global market. So if you
want to enter the global market, you have to play by their rules,
not by your own.

Q: What about the central bank's governor's statement that
ruled out the possibility of devaluation, is it effective enough
to brush off the rumors?

A: If you are a fund manager, you can see how confident a
governor of a central bank is when he makes such a statement. The
level of confidence of a fund manager also depends on which
central bank the governor belongs to. You'd notice the difference
if it were the governor of Federal Reserve Bank or of Bank of
Tokyo making a statement.

We have experienced such things. Although the finance minister
and the central bank governor have both at one time or another
said they would not resort to devaluation measures, they have
sometimes eaten their words and done the reverse. I am just
trying to be objective. But I myself see no possibility of a
devaluation now. Deciding upon a devaluation is a dilemma, like
eating Simalakama fruit, as the Indonesian proverb goes. So the
only thing to do is improve the level of transparency and put
everything on the market judgment. We have to do away with any
forms of monopoly. This is more effective than devaluing the
currency.(swa)

Laksamana Sukardi, a former director of Lippobank, is now
Associate Director and Co-founder of Advisory Group on Economic
Industry and Trade.