Rupiah woes a lesson in crisis management

Rupiah woes a lesson in crisis management

By P. Usmanto Njo and Marike Stellinga

JAKARTA (JP): Indonesia received an unwanted present for its
52nd anniversary. Like a tsunamic attack, the exchange value of
the American dollar skyrocketed.

The rupiah exchange rate may be on its way back up but the
damage is already done.

With the rupiah battered, Indonesia's rising star status has
suddenly turned sour. Its long struggle against inflation now
appears to be lost, just as the government became optimistic
about achieving its 5 percent inflation target.

The prices of various commodities -- including wire, paper,
sugar, electronics and cars -- are already creeping upwards. Like
the rupiah, these prices may fall again but are unlikely to
return to their "normal" levels.

Interest rates have become extremely high, at 30 percent to
40 percent for short term deposits, and are choking growth and
decreasing company profitability. Exporters may gain in the short
term, but should prices continue rising such gains will be
swallowed by inflation.

Sadly, the volatility of the rupiah in the past few weeks also
implicates the consequences of distribution and testifies to the
vulnerability of the Indonesian monetary authority.

The return of the dollar's exchange value to its early August
levels may well indicate some profit-taking exercises, rather
than the attainment of a fundamental equilibrium.

As a result, repeat attacks against the rupiah remain a
possibility and Bank Indonesia will likely keep the monetary
situation tight for some time.

By selling dollars at high rates, speculators essentially
proclaimed their triumph and reaped the reward of high rupiah
returns. BI vowed to crush the "tail that wags the dog situation"
when it announced the floating of the rupiah on Aug. 14, 1997.
But in the end, it is the majority of Indonesians, despite being
poor and financially unprotected, who must pay for the
speculators profit.

What can be learned from the turmoil? We know that not even
the wildest predictions could have cast a shadow on the past two
weeks.

Indonesia's economic fundamentals are repeatedly said to be
sound, displaying high growth, low inflation, a manageable
current account deficit, sizable foreign reserves (including a
standby facility), a balanced budget and prudent macroeconomic
management. Why then was the rupiah under such massive strain?

The inherent volatility of globalized finance, what President
Soeharto called "new realities", is a common explanation. With
huge cross-border capital flows -- which reached a record US$ 244
billion for developing counties last year -- economies are
increasingly vulnerable and dependent upon the rest of the world.

In this era of technology people are better and faster
informed. But in hectic or uncertain times, when a lot of markets
show large changes in prices, traders are increasingly afraid to
draw an opposite conclusion to the market.

This brings us to the so-called "herd behavior". If everybody
is running in one direction and you are not sure where to go,
would not the best choice be to follow the rest? In such an
environment a floating currency has the potential to overshoot
its value. And stock markets can reach levels that are below
their intrinsic value.

World Bank representative Dennis de Tray was recently quoted
as saying that confusion and uncertainty had taken hold of
regional financial markets as people adjusted to the workings of
floating currency regimes.

In retrospect, there appeared to be too much optimism among
domestic and overseas investors in Asia, in general, and in
Indonesia, in particular. Local companies borrowed externally to
finance increasingly ambitious projects, gambling with the
assumed, long-term stability of the rupiah.

A report last month by PT Jardine Fleming Nusantara estimated
that 50 percent to 60 percent of listed companies had total debts
denominated in foreign currencies, particularly the U.S. dollar.
This contributes to the picture of Indonesia as the third largest
foreign borrower in the world.

As of June 1997, the ratio of Indonesia's total foreign debt
to foreign reserves was about 500 percent, compared to 220
percent in Thailand.

A total of US$30 billion in company debts in Indonesia is
believed to take the form of an unhedged dollar denominated debt.
Ironically, the BIS (Bank for International Settlements) has been
reportedly "wagging a finger at banks and investors around the
world for what it sees as a growing appetite for risks".

Interestingly, in the 12-day period to Aug. 19, the Indonesian
rupiah was virtually slipping against most other currencies,
including the Singapore dollar and the Malaysian ringgit. BI's
selling rates for American, Australian, Hong Kong dollars and the
yen jumped by 15 percent to 16 percent, on average. The French
franc, German mark and Dutch guilder appreciated by 18 percent to
19 percent during the period. The selling rates of the Singapore
dollar and Malaysian ringgit increased by 12 percent and 9
percent respectively.

Indeed, after an initial, regionally-driven beating, the
rupiah and the JSE were slugged again by internal pressure. Not
only did firms buy dollars to hedge large, open dollar
liabilities, but also ordinary Indonesians falsely sought to
secure their meager savings by buying dollars.

So fragile was Indonesian confidence in the rupiah that the
dollar remained a selling commodity here when overseas fund
managers had already stopped dumping the rupiah. Of course, wild
rumors, including the "death" of Finance Minister Mar'ie Muhammad
while he was actually enjoying his afternoon jog, further
embellished the situation.

The reading of these events is one of inherent restlessness
within the Indonesian society. Undoubtedly, as manifested in the
recent social riots, a "political overhang" remains and
unresolved social discord points to the potential for future
eruptions.

Controversial projects such as the national car, the Jakarta
Tower and the N-2130 jet, have added fuel to the fire. Without
substantial political reform, anticipation of eventual "trouble"
will remain widespread. And, in this scenario, the rupiah -- the
token of Indonesia's economic and political system -- will
continue to be vulnerable to swings in popular mood.

Of course, globalization accommodates these sentiments. In a
globalizing economy market, forces become more powerful and
destructive if they are not harnessed properly. Policies that
obstruct market dynamics will prove increasingly costly and
inefficient.

Alas, while successive economic reforms have become the
hallmark of Indonesia's impressive performance, the tide of
deregulation seems to have surrendered in recent years to the
persistence of vested interests in important industries.

At this stage, we could at least make a positive point.
Indonesianist Hal Hill has pointed out that the nation is an
effective crisis manager. That is, in bad times, Indonesia's eco
nomic policy becomes more market oriented as the position of
technocrats in the government becomes stronger.

The current rupiah crisis, at least, has reasserted the need
for streamlining the Indonesian economy and revive the momentum
of deregulation in the country.

P. Usmanto Njo is a Ph.D student from the Asia Research
Center, Murdoch University, Western Australia. Marike Stellinga
is an MA student from the Department of International Financial
Economics at the University of Amsterdam, Holland.

Window A: What can be learned from the turmoil? We know that not
even the wildest predictions could have cast a shadow on the past
two weeks.

Window B: The current rupiah crisis, at least, has reasserted the
need for streamlining the Indonesian economy and revive the
momentum of deregulation in the country.