Rupiah remains weak

Rupiah remains weak

Indonesia is facing a great dilemma in implementing the
reinforced and strengthened economic reforms agreed upon with the
International Monetary Fund last Thursday. The crux is that a
persistently volatile and weakening rupiah would make it next to
impossible to implement the 50-point package of sweeping, painful
reform measures.

The level of the rupiah's exchange rate seems a much lesser
problem than its stability. Businesspeople say it would be much
better and conducive for businesses and investments if the
rupiah's value against the U.S. dollar stabilize at, say, between
6,500 and 7,500, instead of spiraling between 6,000 and 9,000.
Such a fairly stable band would allow for reasonable cost and
risk calculations.

However, all analysts are attesting, and market sentiment has
been demonstrating, that the rupiah's rate will remain highly
volatile if the urgent problem of the private sector's short-term
debts, estimated by the IMF at US$20 billion, is not adequately
addressed and if political uncertainty is not removed. The short-
term debt overhang would make the foreign exchange market
persistently nervous and place it under strong pressures, while
monetary authorities would remain in the dark about the day-to-
day requirements of dollars for debt repayment and servicing.

The government made the right decision not to bail out
private-sector debtors, and predictably the reform package does
not directly address the debt problem. This does not, however,
mean that the debt problem can simply be ignored or left for the
debtors themselves to settle. As previously mentioned, the
private-sector debts also stand in the way of a stable rupiah.

The special team, headed by former minister Radius Prawiro,
assigned by the President to help private-sector debtors to
negotiate for debt rescheduling or rollovers, should act
immediately to quickly take stock of the problem. This means that
debtors who are insolvent, structurally weak and mismanaged
should be allowed to declare bankruptcy and be liquidated through
an expedient legal process. This would rub salt into the wound,
but it would be much better for strengthening economic
fundamentals. Allowing these insolvent enterprises to continue
operations would not only affect the whole business climate, but
also would stifle the effects of the reform package.

The solvent companies which are facing only short-term
liquidity problems due to the rupiah turbulence should be helped
in dealing with foreign creditors. We are confident that foreign
creditors are now in a better mood to negotiate after President
Soeharto showed stronger commitment to the reinforced reforms as
the medium-term outlook of the economy seemed more promising.

The fact that the IMF did not demand a pledge to carry out the
strengthened reform package from anyone other than the President
-- as it did in South Korea last month by demanding the
commitment from presidential candidate Kim Dae-jung -- clearly
means that the 76-year Soeharto will surely be reelected in March
for a seventh five-year term. President Soeharto's explanations
after the signing of the letter of intent on the reforms also
provided a clear, firm signal that he will be in full charge and
responsible for the implementation of the three-year package.

Yet, the market still harbors widespread uncertainty about the
future direction of government arising from the President's age
and uncertain health as both Soeharto and the dominant Golkar
political organization strongly uphold the convention on the
announcement of a vice presidential candidate. Moreover, the
people have yet to see a concrete start of a widely demanded
gradual process of political reform to create good governance,
seen mainly as a prerequisite for smooth implementation of
reforms. All this makes the reform package lack credibility.

Obviously, we cannot afford to wait until March for a fairly
stable rupiah exchange rate. The more devastating would be the
impact if the rupiah's volatility persisted until April when the
economy would be jolted by a new wave of steep price increases as
a result of a gradual reduction of fuel oil, food and electricity
subsidies. The people who have been suffering a lot might then
lose confidence in the benefits and efficacy of the reforms.

We therefore feel compelled for the umpteenth time to make
this point. Given the unusually grave crisis the nation is now
in, and the fact that the political uncertainty stands firmly in
the way of the rupiah's return to a fairly stable range of
exchange rate, Golkar, together with the Armed Forces, after
consultations with the President, should not wait until the first
week of March, as the convention requires, to announce its
candidate for the next vice president.