The market jitters

The market jitters

Most analysts agree that last weekend's riots have not
adversely affected the confidence of businessmen on the prospects
of Indonesia's economy, especially now that order has been
restored and life has almost returned to normal in the bustling
city of around 10 million.

Nonetheless last week's incident has made people nervous,
especially the foreign portfolio investors and foreign exchange
traders. This is normal because they are the ones who can react
immediately by unloading their stocks or by closing their rupiah
positions in favor of the American dollar or other major foreign
currencies. This once again shows the disadvantage of short-term
capital flows. They can help beef up the capital account but they
can also fly away simply because of rumors. This is why the
monetary authority is uncomfortable with too much short-term
funding, no matter how badly it is needed given the large current
account deficit.

Unlike portfolio investors, foreign direct investors are not
highly susceptible to one-off incidents or rumors because they
look more at long-term trends. A greater worry for them is
inconsistency in policy. It is therefore most imperative that the
government should never show an inclination to reverse even a few
of the economic reforms that it has introduced.

We are encouraged, however, to observe that the speculative
attacks on the rupiah early this week were not as strong as those
in early 1995, during the Mexican financial crisis. To our
knowledge, the dollar rush early this week has not forced the
central bank to intervene heavily in the market. The central
bank's move in mid-June to widen the dollar-rupiah trading band
seems to have succeeded in quelling a big wave of currency
speculation.

We fully agree that the nervousness among businessmen which
was caused by the riots will be temporary because the
fundamentals of the economy are sound and almost all economic
factors remain strong. However, if the rumors continue, even the
general public will get edgy, but not as edgy as the foreign
investors who are staking their money in the country primarily
because of its stability. In an atmosphere where freewheeling
public discussion is restricted and the mass media is heavily
guided by the government, rumors can still have an impact however
insensible they may be.

It will therefore take a few weeks of steady calmness and
order, bereft of rumor, to overcome this temporary anxiety.
Scenes of street demonstrations, although peaceful, are always
unnerving partly because such dramatic events attract mass media
attention and are "exotic" food for the TV broadcasting services,
notably the foreign ones. Hence, the firmness with which the
security officials have acted to restore law and order is highly
understandable.

Hopefully, the costs exacted by last week's riots -- either in
human life, burnt office buildings, motor vehicles and other
fixed assets or lost sales and business opportunities because of
offices and shops being temporarily closed -- will improve our
appreciation of the great importance of stability which we have
enjoyed over the past three decades.