The rupiah recovery

The rupiah recovery

The string of good news since early August seems to have
ignited the beginning of the long-awaited recovery of the rupiah,
pushing it into a range of between Rp 10,800 and Rp 11,000
against the American dollar for the past eight weeks. Still more
encouraging was the fact that the market seemed to shrug off the
series of isolated riots in several towns over the same period.
The currency remained fairly stable in its newfound range, except
briefly on Sept. 8 and Sept. 9, when it returned to below Rp
12,000 in reaction to a short-lived renewal of massive student
demonstrations in Jakarta and Surabaya.

The latest good news on the economy broke last Friday, when
the International Monetary Fund (IMF) approved the release of a
further $1 billion from its $11.3 billion bail-out fund for the
country. Furthermore, there are strong indications that the
government's adherence to the IMF program of reform could result
in a resumption of a quarterly issue of $3 billion after the next
two monthly installments are disbursed on Oct. 25 and Nov. 25.
The IMF initially planned to release the loans on a quarterly
basis over a three year period ending in the year 2000 before
doubts emerged over the government's willingness to implement the
reform program and widespread social unrest here lead to a change
of heart.

One week earlier, Paris Club creditors agreed to reschedule
$4.2 billion of government debt repayments that would otherwise
have fallen due within the next 20 months. This followed an
impressive breakthrough resulting from the finance ministry's
efforts to recover the bulk of the Rp 140 trillion issued as
emergency liquidity support to ailing commercial banks by Bank
Indonesia.

The big question nonetheless, given the false dawns which have
intermittently raised hopes of a recovery in the rupiah since
February, is whether or not the latest rally in the currency
markets is sustainable in nature and capable of driving the
rupiah on towards the year-end target of Rp 10,000 against the
dollar. Although this modest rate would still be 76 percent lower
than the rupiah's pre-crisis level of Rp 2,400 against the
dollar, it would still be considerably better than the depths
which the currency plumbed in May, when it was briefly worth 85
percent less against the dollar than it was before the crisis.

A stable rupiah is critical for the economy, because it is a
prerequisite for a cut in the punitively high interest rates of
over 65 percent which have sent our economy into hibernation. The
longer these interest rates are allowed to choke the economy, the
greater the number of bad bank loans there will be. This will
compound the difficulties of our ailing banks, which in turn will
filter through into the corporate sector, leading to more and
more bankruptcies and inflicting yet greater damage to the
fundamentals of the economy.

No one seems to doubt the government's determination to bring
about economic reform, as agreed with the IMF, and to pursue
economic management with common sense as its guiding principle.
That is all well and good, but most of the destabilizing factors
that have the potential to abort the rupiah's recovery, even as
it is beginning, lie in the social and political fields. As long
as the market remains apprehensive and therefore susceptible to
social and political instability, the recovery will remain on
shaky ground. Market jitters on the rupiah are related mostly to
the high risk of renewed social unrest and massive student
demonstrations.

Fortunately, though, it is within the government's ability to
control these potentially damaging factors. First of all, the
risk of renewed social unrest on a massive scale could be
minimized if the government made improvements to the way in which
subsidized staple foods and other essential commodities are
distributed.

As regards political risks, the immediate test facing the
government is how to resolve the controversy it has built up
around the plans of the Indonesian Democratic Party (PDI) faction
loyal to Megawati Soekarnoputri to hold a congress in October.
Failure to solve this potentially explosive problem could lead to
an outpouring of frustration and anger on the urban streets of
this country.

Yet another big test in the offing is how successful the
government will be in channeling the general public's aspirations
during the extraordinary session of the People's Consultative
Assembly (MPR) which is to convene in the second week of
November. Of equal importance is how it goes about trying to
convince the general public that it is serious in its efforts to
bring the corrupt, the collusive and the nepotistic elements of
the previous government to justice, and more specifically, how it
goes about dealing with former president Soeharto's perceived
abuse of power to further the interests of his family and close
cronies.

The recovery in the rupiah will be more durable if the
government succeeds in fulfilling its main agenda, namely to
enact new political laws capable of ensuring overall political
reform and guaranteeing a fair, open and honest general election
in the middle of next year.