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Rupiah defies Indonesia's
gravity
By Gary LaMoshi
DENPASAR, Bali - One of the world's great
mysteries, right up there with how Jiang Zemin's hair
stayed black for all those years, is that amazing
strength of the Indonesian rupiah on foreign-currency
markets, defying the gravity of Indonesia's economic
situation. As someone who earns other currencies but
often spends rupiah, I pay close attention to these
market fluctuations. If I can't profit from them, at
least I try to understand them, though I find either
goal elusive.
Since Indonesian legislators drove
president Abdurrahman Wahid from office in July 2001,
the rupiah's US dollar exchange rate has strengthened by
more than 20 percent from 11,000 to the 8,670 it touched
on Monday, a one-year high. That rise mirrors the drop
in the value of the US dollar against the euro in recent
months, but the resemblance doesn't explain the
phenomenon.
Other Southeast Asian currencies
haven't appreciated the way the rupiah has in the wake
of the greenback's weakness. Those currencies remain in
their established post-financial-crisis trading zones,
while the rupiah is still far stronger than its usual
benchmark of 10,000.
Before the regional economic
collapse of 1997, 2-5 was the rough reference point for
US dollar exchange rates in Southeast Asia: 2.5
Malaysian ringgit to the dollar, 25 Thai baht, 25
Philippine pesos, 2,500 rupiah. The crisis changed
multiple for the first three currencies to 4-0 (Malaysia
lowered its number with currency controls, and the
Philippines pushed its above 50 when it ousted president
Joseph Estrada for Gloria Macapagal-Arroyo), so you
needed 1.6 times as many local units to buy the same
number of dollars. By contrast, the rupiah went to
10,000, meaning you needed four times as many for the
same number of dollars. From that perspective, the
rupiah has merely been closing a wide value gap with the
currencies of its neighbors that, at least in the case
of Philippines, don't stand that far above Indonesia on
the political economy hit parade.
Over the past
two years, one of the best investments on the planet
would have been converting your dollars to rupiah and
putting them in the bank in Jakarta. You would have
earned about 13 percent on the bank deposit, plus the 21
percent currency appreciation. Of course, that
investment requires faith - not just faith in the rupiah
but faith in an Indonesian bank, and that gets to the
fundamental reason I find the stronger rupiah tough to
understand.
Like stock prices for companies,
currency rates roughly equate to a market judgment of
the issuing country. I have a tough time seeing that
things have been more than 20 percent better for
Indonesia than for the United States over the past 22
months. Each nation is saddled with an addle-brained
second-generation president with a shaky mandate
fronting for the nation's basest entrenched interests.
Each country was the target of a devastating terrorist
attack and has a huge budget deficit, dwindling tax
collection, and sluggish business climate. Of course, as
the world's largest economy, the US has a far stronger
base than Indonesia without major risks - collapse,
coup, chaos - that Indonesia faces.
Which brings
me back to the question, why is the rupiah up more than
20 percent against the dollar? At a loss intellectually
and financially, I asked an expert, Deborah Pastor, a
20-year veteran of the currency pits, and now the
portfolio manager for Privateer Asset Management and
director of eRaider.com. "Watch the cash flows," Pastor
counseled. "The economy is somewhat regulated by capital
flows."
While currency rates depend on the
strength of the economy, they're also subject to the
laws of supply and demand. The rupiah's dramatic drop
relative to neighboring currencies in 1997 indicates
that people sold "everything and the kitchen sink",
Pastor explained. "The bad news was already out there,
and there were a lot of short positions in place." In
other words, there weren't many rupiah left to sell
after that, so the currency price couldn't sink much
further.
By the same token, once there was a
reason to buy rupiah, the price was bound to rise. "With
privatizations and bonds sales, there are rupiah assets
to buy again and now people want some rupiah. They
haven't been holding any, so they have to go into the
market to get it, and that pushes the value up,"
according to Pastor. "In cases like this one, it's just
a question of cash flow, not an endorsement of the
economy as a whole."
That's sensible as far as
it goes. But a currency also needs a strong underlying
economy and a stable civil system to support whatever
value the market assigns. Neither is on tap in
Indonesia.
As the rupiah soared on Monday, the
courts stooped, handing seven Kopassus special forces
troops sentences ranging from 24-42 months for the
murder of Theys Hiyo Eluay, a non-violent advocate of
Papuan independence. The trial failed to establish who
gave the order for the November 2001 killing, and three
of the convicted murderers were not even discharged from
the army. Under normal circumstances, the courts mete
out justice to the highest bidder.
One of the
current hot debates in Jakarta is whether Indonesia
should pull out of its International Monetary Fund
agreement when it expires late this year. Advocates on
both sides of the debate agree that the IMF program has
brought neither reform nor recovery to Indonesia. Well,
there's a good reason for a stronger currency.
The privatization program that's boosting demand
for rupiah remains a mess. The government has failed to
explain privatization as anything more than a device to
fund the budget urged by the IMF. While tycoons maneuver
to get back their assets the government kindly bailed
out of bankruptcy (see The Lippo Bank saga, March 23),
legitimate privatization sales to overseas investors get
bogged down in political wrangling and nationalist
rhetoric.
Corruption is one of Indonesia's few
growth industries, as weakened central authority expands
opportunities for graft at all levels. National
elections due next year will produce further sleaze
(such as the re-election, if not the presidential
candidacy, of convicted felon and House Speaker Akbar
Tanjung) and add further political paralysis to a
process that's already near gridlock.
Fortunately, the legislative standstill won't
derail implementation of an effective economic recovery
program; President Megawati Sukarnoputri's government
hasn't got one. There's no plan for getting the
estimated 40 million unemployed back to work, or lifting
100 million citizens above the poverty line. Export
industries suffer with the stronger rupiah, while the
government cites the rising currency as one of its key
achievements.
To this observer, the rupiah's 20
percent rise against the dollar seems insane. If you
play the currency markets, it seems rational that the
rupiah will fall rather than rise against the dollar, if
only to correct this overshoot from its previously
established level. Of course, an aphorism widely
misattributed to John Maynard Keynes warns, "Markets can
remain irrational much longer than you can remain
solvent."
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