Rupiah weak waiting on IMF outcome

The rupiah has lost ground as the currency market waits for the outcome of negotiations between the Indonesian government and the International Monetary Fund (IMF). Economist Kwik Kian Gie shares his thoughts on the situation.

Questionb: Why has the rupiah lost ground again?

Kwik Kian Gie: Talks with the IMF have not been fruitful, while demand for dollars surges. Like many other people, I'm still in the dark about what the IMF's package would look like.

Some people have said the problem is psychological and that a reasonable IMF package should calm the market.

True, but only temporarily. When news first came that the IMF would help Indonesia, the dollar rate fell by Rp 100 every day for three consecutive days. After that, it started to climb again.

Q: Some experts have said that a realistic value for the rupiah would be between Rp 2,800 and Rp 3,000...

K: I don't know how they arrived at those figures. One factor that determines the rupiah's value is the purchasing power parity. Another is psychological. There's a third factor that is very influential: an imbalance between demand and supply.

We can eliminate the psychological factor through IMF intervention. The IMF can calm the market by saying that based on purchasing power parity, the realistic value of the rupiah is between Rp 2,800 and Rp 3,000 per dollar. But how do you eliminate disparity between demand and supply?

Q: Can you explain the surge in dollar demand?

K: I can't explain it with figures because they're not available. Bank Indonesia has just started collecting details of the private sector's debts denominated in dollars. We only know that demand for dollars exceeds our needs to finance imports.

The government is keeping its own foreign exchange reserves to service its own debts. Meanwhile, the dollar debts of private companies are estimated at US$60 billion. That's a very large amount to service.

The dollars that were used to purchase shares at local stock exchanges have left the country. So have the dollars that were once deposited at local banks. The influx of foreign investments at one time also supplied dollars to the local currency market.

That leaves us with dollars from export income, and they are also drying up as we are headed towards a trade deficit.

Q: Is it possible that the currency market has been affected by reports that many private debtors are not sound?

K: Very possible. They are desperate for money. They have exhausted the funds at the Jakarta Stock Exchange. They have taken large loans from state banks, and some of these loans have became problematic. They have tapped funds from private banks, some of which were part of their own conglomerations. And they have turned in great numbers to foreign banks for offshore loans.

Q: Couldn't offshore banks have detected from the audited financial reports that these companies were overborrowing?

K: Even financial reports audited by the best public accountants could be forged. Accountants and companies work under the agreement that the responsibility for accuracy lies with the companies, not the accountants. This is standard practice in the Association of Indonesian Accountants.

The companies would forge documents about their debts because there are no sanctions if they are found out.

Q: Couldn't the foreign banks have foreseen this problem?

K: They and other fund managers could not have resisted the temptation of investing in Indonesia. They simply couldn't stop it. Now they have completely changed. All investment plans in Indonesia have been canceled.

Q: What do you think the IMF should do now?

K: The IMF should make known its opinion of what it considers as the realistic rupiah's exchange rate. It would be even better if it explained the methodology used.

The IMF could announce that it had the funds to support the rupiah rate. It does not have to disclose by how much.

With IMF and World Bank support, the government should seek to reschedule its foreign debts, postpone their payments and spread them out in small installments.

The Indonesian Chamber of Commerce and Industry could negotiate on behalf of the private companies with bank creditors to reschedule their debts and also to spread out the repayments.

Meanwhile, we need to resolve the problem of bad debts. We have to use from the state budget to clear these bad debts out, say, within three years. Those who have defaulted on their payment should still be punished.

And there are the long-term solutions such as deregulation and uprooting corruption.

Q: Would aid-donor countries and foreign banks agree to this idea?

K: They have no choice. There's a saying that if the debt is small, the borrower is in trouble. If the debt is big, the bank is in trouble. But if the debt is excessively large, the whole world is in trouble.

Creditors are not obliged to give loans to Indonesia.

Obviously, they won't give the money immediately. They will make calculations. They know they have to share the consequences if their judgment proves to be wrong.