STABLE RUPIAH AGAINST VERY UNCERTAIN POLITICS
> Kadin Indonesia Bulletin <
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STABLE RUPIAH AGAINST VERY UNCERTAIN POLITICS |
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> Kadin Indonesia Bulletin < |
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Desember 1998 Since September we have the great anomaly that the rupiah has remained relatively stable at around Rp7,500 to a US dollar, against the background of continued great political uncertainty. Since the beginning of the year the rupiah kept plunging, once briefly touching Rp17,000 per dollar. It is very difficult to rationally explain this "market sentiment". Fact is that the daily turnover in the foreign exchange market is very thin, in the order of a few tens of millions of dollars. Normally the volume would be ten times while before the crisis it could reach a billion dollar. For one thing, large speculative movements have not been forthcoming. Massive international speculation has been absent from the Asian market since a very large U.S. hedge fund got their fingers burnt in the Russian market. Perhaps, domestic parties who wanted to evacuate their wealth in the face of severe political turmoil after the fall of Suharto have done so already and not much liquidity is left. The government and the Bank Indonesia denied heavy intervention in the market, and that may be technically true, but substantial conversions of foreign aid into rupiah to finance the government budget have produced the same effect. The export surplus remains large as imports are still well below normal. The government also reports that the government budget remains well under control. Actual expenditures have been lower than target as there seems to be a "lack of absorptive capacity" to execute the large programmed spending on social safety nets. The bureaucracy is allergic to potential charges of corruption in handling of foreign aid and would rather do nothing. On the other hand, the government also reports actual revenues exceeding targets, among others because of tax payments on paid interest (of over 50% p.a.). With interest rates still kept high, the monthly rate of inflation has subsided, although the annual rate will still come close, or perhaps even exceeding, the projection of 80% for the year. Will this trend continue? Perhaps in the near future. The governor of Bank Indonesia has stated that the rupiah could strengthen further towards Rp.6000, although he has set no target and will leave things to the market. Perhaps it will, for the next few months. The stable rupiah trend may reinforce itself as parties may unload their speculative dollar holdings. The IMF monthly disbursements of close to a billion dollars will continue for a few more months, but then will taper off. The relative monetary stability has not been supported as yet by resumption of private flows. The large foreign aid (programmed at $14 billion for the fiscal year) flows have been the saving grace. Will the availability continue into the next budget year? This is still uncertain, but there is a chance. The Japanese and the Americans have tabled significant aid initiatives at the last APEC summit. There is the Miyazawa $30 billion plan and the US-Japan initiative of $10 billion to help Asia to get out of the crisis. The portion allocated to Indonesia may not be enough, compared to the $14 billion for this year, but there is still enough international support for the crisis stricken Asian countries. Of course actual flows will depend on whether the self help measures of the Asian countries instill confidence. There are also early signs of abatement of the Asian financial crisis. The IMF is confident that Korea will resume positive growth sometime next year and Thailand will follow suit. The prospect for Indonesia is still much more uncertain because of the political situation. But at least Indonesia could benefit from an improved sentiment in the international market. But this improved international prospect is still full of question marks. First of all, it will depend on whether the stimulative measures by the Japanese government to reflate its economy will have the desired effects. So far the Japanese economy is languishing in very low growth with no consumers' confidence. Then comes the problem of the Russian and the Brazilian economy, whether they will go down the drain or not. If in Indonesia the government can work out a political peace with opposition groups, that will be a great help. Hence political developments have to be watched in the month of December, or perhaps in January. |
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