An old enemy of Indonesia is once again causing havoc for the economy. The South East Asian giant is being hit hard by a plunging currency and the government seems incapable or unwilling to admit the country is facing a crisis.
Vehicles are seen stuck in a traffic jam during rush hour in Jakarta. REUTERS / Supri
Vehicles are seen stuck in a traffic jam during rush hour in Jakarta. REUTERS / Supri

The Indonesian economy is being plagued by a new crisis in the second half of this year.

It is reflected by the drastic weakening of the national currency the rupiah against the US dollar. Nowadays, more rupiahs must be used to buy a single dollar.

Indonesia extended a US$12 billion swap line with Japan last month as policymakers tried to bolster a rupiah that has fallen more than 16 per cent this year, the worst performance among 24 emerging-market currencies tracked by Bloomberg.

The average exchange rate of the rupiah from December until May 26 was about 9,800 rupiah to the US dollar. However, since June, the currency has been falling rapidly and hit about 11,000 rupiah at the end of last month.

For this reason, Sri Adianingsih, a member of the expert’s council at the Megawati Institute think tank, called upon the Indonesian government to swiftly admit the economy had entered a critical situation.

“Our economy is facing a critical phase and if it is not handled properly it might fall into a full-blown crisis,” Ms Adianingsih said on August 28.

“The government must admit that the economy is facing a problem, but if they do not want to admit this critical situation, then a solution to the problem will not be found.

“If a person is ill but not being seen as truly ill, then that person will be taken to a clinic,” she added.

“However, the person is actually seriously ill and must be taken to the intensive care unit of a big hospital.”

Her call came after the Indonesian government, through the minister of finance Chatib Basri, had stated the Indonesian economy was not at risk.

The government has launched at least four policies to respond to the crisis in the money markets in the country. However, they have not been effective and the markets have responded negatively.

Those involved in the money markets have responded indifferently to the policies of the government because they consider them to be too long-term in nature. They emphasise that short-term policies are necessary now.

However, the Indonesian parliament has shown it is concerned about the weakening rupiah.

The special parliamentary commission numer 11, overseeing the financial and banking sectors, called the representatives of the ministry of finance, the central bank, the institution of loan securities, and monetary services authorities to attend a special meeting last month in a bid to work out why the fiscal policies of the government have not yielded positive results.

Parliament has also put pressure on the central bank to keep the rupiah stable at the exchange rate of 10,000 to 10,200 rupiah to the dollar, according to reports.

At this level, the rupiah would still be close to the 2013 state budget forecast, which assumed an exchange rate of 9,600 rupiah to the dollar, according to Harry Azhar Azis, the vice chairman of the parliamentary commission 11, who was quoted by the Indonesian Antara news agency.

However, the governor of the central bank Agus Martowardojo, refuted the claim his institution was asked to keep the rupiah in the 10,000 to 10,200 range, saying there had been no such demand. He emphasised that the central bank did not set levels of the rupiah, but did try to keep it stable.

Yesterday, the rupiah was at 11,516 to the dollar, the lowest since April 2009, after reaching 11,586 earlier, prices from local banks show.

Indonesia said yesterday it planned to boost bilateral swap agreements to almost $40bn by signing deals with China and South Korea and increasing an existing agreement with Japan.

The country may sign an agreement with China next month when the president Xi Jinping visits Indonesia, the industry minister MS Hidayat said in Jakarta yesterday. It may extend a bilateral swap agreement with China, Bambang Brodjonegoro, the head of fiscal policy at the finance ministry, said this month, according to Bloomberg.

A record current-account deficit and the prospect of reduced US stimulus has spurred outflows. The government will also unveil an easing of investment rules in a few weeks, Basri said separately yesterday.

Indonesia and China in 2009 agreed on a three-year 100bn yuan (Dh59.86bn) currency swap to ease foreign-exchange shortages and aid bilateral trade and investment. Mr Xi is due to visit Indonesia to meet president Susilo Bambang Yudhoyono on October 2, according to the Indonesian presidential office.

The Indonesian parliament not only blames the budget deficit for the currency’s woes, but also the actions of currency speculators, which have a combined detrimental effect on the rupiah. In addition, however, the finance minister’s insistence that the national economy has not yet entered a crisis has not helped the national currency.

It seems the Indonesian government is unable the rupiah’s slide. Although the government appears to be very optimistic about its interventions and policies, the marketremains unconvinced.

The money markets players in Indonesia consider government measures to be ineffective and incapable of strengthening the rupiah and increasing index values and that in fact, it has actually worsened the situation.

As a direct consequence of the currency’s headlong fall certain assumptions in the 2014 state budget have been rethought. In the previous budget the government assumed an economic growth rate of 6.4 per cent year on year. Now it predicts 5.8 per cent. The inflation rate, in turn, has been scaled up from 4.5 per cent year on year to 5.5 per cent in the state budget for next year.

In addition, exchange rate assumptions have been revised fromn a previous 9,750 rupiah to the dollar, to 10,000 to 10,500 rupiah. Mr Basri says the budget has been based on the prediction that oil prices will remain the smae as they are now.

However, he admitted there would be continuous pressure on the rupiah, which would be especially felt in November and December due to requirements to pay down debts and other obligations in dollars. But, as the money men in Indonesia probably feel now, what the government says and what the reality is can be two very different things.

Published: September 24, 2013 04:00 AM


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