Rupiah attacked
Rupiah attacked
The region's contagion of currency speculation finally hit the
Indonesian currency after a concerted attack yesterday, pushing
down the rupiah to as low as Rp 2,665 to the dollar. That was a
plunge of almost 5 percent, its largest-ever, single-day loss
after the previous record low of Rp 2,642 last Friday. The rupiah
recovered later in the afternoon to Rp 2,635 after some
intervention by Bank Indonesia even though the rate had never
fallen below the Rp 2,681 level, the lower end of the trading
band set on July 11 as the threshold for intervention.
None of the market analysts doubted that the speculative
attacks on the rupiah were simply a regional contagion after
similar attacks on the Thai baht, Philippine peso and Malaysian
ringgit.
The move against the rupiah was nevertheless surprising as it
came after Bank Indonesia took what it called a preemptive move
to ward off speculators. The bank widened the rupiah-dollar
trading band from 8 percent to 12 percent on July 11 immediately
after the de facto devaluation of the Philippine peso and Thai
baht early this month . The jittering, however short term it may
be, still seemed inordinate, especially after the strong vote of
confidence in Indonesia's macroeconomic management and economic
fundamentals by the creditor consortium (Consultative Group on
Indonesia) at its latest annual meeting in Tokyo last week.
Most dealers saw the attacks as a test, by foreign
speculators, on the central bank's intervention band. Foreign
speculators seemed unsatisfied until they had tested all the
currencies of Southeast Asian countries with large current
account deficits-- Thailand, the Philippines, Malaysia and
Indonesia.
Even though pressures on the rupiah were a regional contagion,
Bank Indonesia's quick decision yesterday to intervene, even
though the rate had not breached the lower end of the band,
should be welcomed as a signal of its strong determination to
defend the rupiah.
Most important was the effectiveness of the intervention in
preventing the market nervousness from worsening and possibly
causing unnecessary jitters among domestic traders. However
strange it may seem, domestic traders usually follow the
sentiments of foreign speculators.
The rupiah volatility is expected to be a temporary phenomenon
as the attacks had nothing to do with doubt about the economic
fundamentals, which all foreign and domestic analysts assess as
strong, nor about the macroeconomic management, which is seen as
sound.
Complacency is by no means warranted, especially because the
currency markets in the region are predicted to remain rather
volatile for the next few days. The government should continue to
provide the right signal to the market. That calls for strong
policy consistency both in the macroeconomic and microeconomic
sectors.
The central bank needs to strengthen cooperation with
commercial banks in defending the rupiah from speculative forays.
Cooperation also means that domestic banks should not let
themselves become prey to the jittery sentiments of foreign
speculators. The business community could also contribute greatly
to putting out the speculative fire by not allowing themselves to
be swayed by wild rumors among foreign fund managers.