Rupiah's growth lacks fundamental support
The rupiah has remained strong in spite of the political upheaval during the recent Special Session of the People's Consultative Assembly. Raden Pardede, a senior economist at the state-owned securities company PT Danareksa, discusses the factors supporting the currency's strength.
Question: Do you think the recent strengthening of the rupiah reflects improvements in the economic fundamentals or has it instead been supported by the central bank's market intervention?
Pardede: The rupiah is strengthening not because of improvement in the economic fundamentals but due to external factors and the intervention of Bank Indonesia (the central bank) or, more accurately, the government.
The external factors include the recent decline in U.S. interest rates and the fall of the U.S. dollar against other major currencies. Internally, the government has been selling its foreign aid funds to obtain rupiah for its budget.
The government has repeatedly denied any market intervention, but market players believe that its dollar sales have an impact similar to intervention. The central bank's sales of about US$10 million to $30 million nearly every day have a great impact on the country's thin money market, with a daily volume of only between $50 million and $100 million.
The only fundamental factor supporting the rupiah is the decline in the inflation rate.
Q: Will the rupiah's value likely remain stable at the current level of about Rp 7,500 per dollar?
P: No. The rupiah's exchange rate depends on the supply-demand condition on the foreign exchange market, while our dollar supplies are now relying too much on the disbursement of foreign aid. We cannot expect much from exports, which are leveling off as international oil prices are declining and demand for other Indonesian products is weakening due to the slower growth of the world economy.
Worse still, capital inflows will not likely occur within the next few months due to political uncertainty.
Q: How can share prices on the stock exchange increase while the rupiah is strengthening?
P: The recent decreases in interest rates on the central bank's promissory notes (SBIs) and the decline in inflation have encouraged investors to reallocate their funds into shares.
Q: How can you say that the economic fundamental factors are not improving?
P: The current account of our balance of payments, for example, is still performing poorly due to the huge deficit in the international trade of services, notably freight and tourism.
Our commodity trade gains a big surplus not because of a significant rise in exports but because of a sharp decline in our imports. Oil and gas export revenues have been declining due to price falls while other export earnings have been expanding only by about 3 percent. That means that our total export revenue is leveling off.
Q: How do you see the domestic supply of goods?
P: The supply of basic commodities is adequate at affordable prices thanks to imports and price subsidies. But the question is for how long the government can afford such huge subsidies. However, the supply of manufactured consumer goods is declining by more than 50 percent from the precrisis level.
The fact that the banking industry has virtually stopped new lendings and imports have fallen to a minimum level further indicate that the production and trading sectors are not moving well.
Q: How about the money supply?
P: Large subsidies have caused the money supply to surge nominally (to Rp 540.86 trillion as of August from Rp 325.91 trillion a year earlier, according to Bank Indonesia) but in the real term, the money supply is declining due to the sharp depreciation of the rupiah against the dollar -- the dollar was quoted at about Rp 2,700 in August 1997 and at about Rp 10,000 in August 1998. Furthermore, most of the money in circulation has gone toward the purchases of SBIs and inter-bank transactions, not to productive activities.
Q: What developments do you expect in consumer prices?
P: I project that the inflation rate, which exceeded 75 percent during the January-October period, is likely to increase by 2 or 3 percentage points in December. Next year's inflation rate may reach 15 percent, far higher than the government's projection of 10 percent.
Q: What about economic growth?
P: The gross domestic product (GDP), which shrank by 13.59 percent during the first nine months of 1998, may contract by 15.5 percent for the whole year. In 1999, the economy is likely to experience a zero percent growth or a contraction of 2 percent.
But a zero percent growth does not necessarily mean the start of economic recovery because this would require a GDP growth of at least 8 percent after a contraction of 15.5 percent this year. (riz)