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.