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.