Rupiah's fall 'no longer economic fundamentals sign'

JAKARTA (JP): The sharp drop in the rupiah against the U.S. dollar in the last three months did not reflect the country's economic fundamentals any more, according to an economist.

Sri Mulyani Indrawati, an economist at the University of Indonesia, said here yesterday that the rupiah's free fall was no longer controllable as almost all segments of society rushed to buy dollars to save their assets.

The push for dollars was not only made by big companies to repay their debts or imports but also by those who felt they had money to protect, she said.

"Even my friends who have deposits of up to Rp 20 million buy dollars as protection. It's quite unrational. Some people even cheer the rupiah's free fall," she told The Jakarta Post.

She said the psychological impact of the frenzy to buy dollars was so strong that the monetary authority could no longer influence the market sentiment.

The government had categorically run out of "instruments" to restore public confidence, she said, citing that the recent announcements of economic reforms to improve the ailing economy did not receive a positive reaction.

"The monetary authority has run out of ammunition to improve the market sentiment," she said. "It now depends on how the government manages its microeconomics," Sri added.

The monetary crisis has hit several Southeast Asian countries since July following the devaluation of the Thai baht. The rupiah has continued to lose ground since then. Its value against the U.S. dollar has now dropped by over 80 percent.

Sri said the fall of the rupiah between July and August was purely "economic" as most foreign investors' withdrawals were based on economic reasons.

"But after that, the rush for dollars continued as people only saw the downward trend of the rupiah," she said.

The rupiah recovered slightly yesterday closing at 5,450/5,650 in the spot market after touching down to a historic low of 5,980 against the dollar on Tuesday. The rupiah was Rp 2,400 against the American greenback in early July.

The Jakarta Stock Exchange's composite index also improved yesterday, closing at 368.68 points, almost half its highest level of 740.93 points on July 7 this year.

The Indonesian government asked the International Monetary Fund (IMF), the World Bank and the Asian Development Bank for help and received a US$23 billion bailout package in mid-October this year. Other bilateral agreements were also made available to supplement the financial package.

The government has taken several financial reform measures, including the closure of 16 banks since early November this year.

Other analysts said the main reason behind the rupiah's free fall was due to the sharp demand from local companies for dollars to repay their offshore loans.

The country's foreign debt stood at $117 billion as of September this year, up 7.3 percent from $109.3 billion recorded in March this year with the private sector accounting for $65 billion and the remaining $52.3 billion by the government.

Most of the private loans were unhedged.

"I haven't seen any constructive action taken by the government to solve the problems since August," Sri said.

She acknowledged that the government had issued several monetary and fiscal measures to calm the market, but they were useless.

"Most of the measures were one-sided. They were not aimed at addressing the market but to defend the government's policy," she said of the reason why every move announced by the government failed to have a positive impact on the battered financial markets. (aly)