The crisis deepens
The crisis deepens
The rupiah predictably plunged past 11,000 to the U.S. dollar
on Monday morning before closing slightly up at 10,700. It
dragged down the composite price index of the Jakarta Stock
Exchange (JSX) to 396.611, below the psychologically important
400 point level, and a 4.2 percent fall from Friday's close.
The absence of any new positive factors to offset the sequence
of bad news that has been accumulating since the February censure
of President Abdurrahman Wahid by the House of Representatives
has further incited panic selling of even blue-chip stocks and
prompted faster dumping of the local unit.
The further steep depreciation of the rupiah is certainly
affecting the outlook of most industrial companies listed on the
JSX due to their high dependence on imported materials and
components and heavy foreign debt burdens. The plunging rupiah
may also dampen consumer confidence and consequently curb private
consumption, thus far one of the main locomotives of the nascent
economic recovery.
Amid the festering political uncertainty that seems to have
turned into a game of brinkmanship between the legislative
Assembly and the President, plus sporadic bouts of civil unrest
and stalled negotiations with the International Monetary Fund
(IMF), not a single economic measure appears to matter anymore.
Bank Indonesia's Senior Deputy Governor Anwar Nasution, despite
appearing desperate and helpless, was right to observe that
intervening in the currency market by selling dollars would be
like pouring water into the desert.
With a total foreign debt of US$140 billion, of which $26.5
billion matures this year, Bank Indonesia, which holds only about
$29.1 billion in gross foreign reserves, is certainly impotent to
influence the demand-supply equation in the market. This is
mainly because the rupiah's fall is caused by demand not for real
transactions (imports and foreign debt servicing) but primarily
for speculative or hedging purposes.
The further jacking-up of interest rates could slightly curb,
but not stop, the rush for the dollar, and the impact of such a
tighter grip on credit might severely devastate the weak banking
industry and could choke economic activities.
Forcing exporters to repatriate their export earnings in order
to increase the dollar supply within the domestic banking system,
as some analysts and bankers have suggested, would most likely be
futile from the outset in view of the complex administrative
systems required. Companies might simply underinvoice their
export prices and overinvoice their import costs in an attempt to
circumvent such regulations.
Imposing direct foreign exchange controls, as Malaysia did in
1998, would not only be suicidal at present. Such a drastic
measure might totally break Indonesia's already prickly relations
with the IMF.
Government economists might argue vehemently that the rupiah
exchange rate is now grossly undervalued, compared with the
economic fundamentals. But economic fundamentals certainly do not
count for much when the system of law enforcement and public
order is breaking down as at present in many parts of the
country. In the perception of the international market the
economy of the country is now so degraded as to have become
virtually a "basket case".
The government's decision on Monday to postpone from April to
October the average 20 percent rise in fuel prices might be
effective in dousing a possible new conflagration leading to
massive protest demonstrations. However, its move to raise fuel
prices in April for large industrial consumers by between 50
percent and 100 percent might threaten not only the budding
economic recovery. It could create a new loophole for corruption
and smuggling.
One can hardly imagine how the state oil and natural gas
company, the corruption-infested Pertamina, would be able to
administer such a two-tier price system in a vast archipelagic
country like Indonesia. But that seems to be the "least worst" of
the alternatives the embattled Abdurrahman administration could
take now, even though it is at the risk of creating new economic
distortions and further inflating the state budget deficit.
It is therefore almost impossible to predict how much further
the JSX index could crumble or the rupiah might fall in the
coming days. We can only hope that Abdurrahman and the House
leaders will immediately stop their bickering, put aside their
power ambitions and start acting and working together to save the
nation from plunging into an even deeper crisis.