Asia Times: Not too happy with very strong currency



	July 03, 1999	atimes.com

Southeast Asia

Not too happy with very strong currency
By Kafil Yamin

JAKARTA - When East Asian currencies took a tumbletwo years ago, the Indonesian rupiah experienced the mostdevastating crash, plunging the country's economy into disarrayand its people into utter despair. These days, the rupiah seems to be recovering at last, but many Indonesians are not any happier. Indeed, the strengthening of the Indonesian money is not welcomed by several business and industrial sectors and even some economists.

Thee Kian Wee of the Indonesian Institute of Sciences, for one,is worried that the ensuing investor exuberance could do more harmthan good. He warns that the government just might be lulled intocomplacency when ''the economy is still a mess''. Says Thee: ''Therupiah [rise] is giving a misplaced sense of euphoria, which isdangerous."

Already, some businessmen are admitting to having been caught unawares bythe sudden strength of the rupiah, which has led to an influx ofimports. With the foreign goods often fetching lower prices thantheir local counterparts, more and more Indonesian businesses arebeing left with large unsold inventories.

Trading at some 5,000 to the dollar in late 1997, the rupiahreached a low of 14,500 to one early last year. But the Indonesiancurrency stabilized somewhat in the last several months, and haseven been gaining significantly against the dollar, hitting6,600 last week.

Economists concede that the recent positive trend has putIndonesia's financial markets on a roll. But they insist that thecountry's economy is not yet out of the sickbed, despite someencouraging indicators. To be sure, they say, monthly inflation is now around zero, interest rates are falling and there are signs of GDP growth atlast. The experts point out, though, that core problems remain,such as the need for banking and corporate debt restructuring, aswell as political certainty.

''The sustainability of the recovery process will depend on thespeed of the recovery of the banks to function normally,'' sayseconomist Sri Mulyani Indriyani of the University of Indonesia,noting that ''70 to 80 percent of investment still comes from thebanking sector.'' She says that if Indonesia remains without a properly functioning financial infrastructure, all the money that is pouring in nowwill disappear as fast as it came. Adds Sri Mulyani: ''This islike a new bubble. . . . It's only very short term. Money can quicklyleave and the bubble will burst."

''This bubble is important because it brings us hope,'' she alsosays. ''But the government should realize that it is just a start.We are in a very fragile condition and very prone to any change insentiment."

Other experts agree with Sri Mulyani, but many of them alsoemphasize that more than any other factor, politics plays the mostcrucial role in Indonesia's economic recovery. Argues analyst NonoWidyaka of Sigma Batara: ''If you talk about the economy, it'smore important to look at the political situation. If that goesokay, it will recover fast."

In truth, economists say. the rupiah's rise may have much to dowith the success of Indonesia's recently concluded parliamentaryelections - the country's first democratic poll in 44 years. But Indonesia's political future remains uncertain as theelection frontrunner - the party of opposition leader MegawatiSukarnoputri - looks like it will not get enough votes to controlparliament. As it is, Megawati is not even sure of winning in thepresidential poll set for November.

Some experts think that the economy's best bet lies in the returnof billions of dollars that were stashed overseas by ethnic Chinese Indonesians following violent racial riots last year. But luring those funds - estimated to reach some $100 billion - back to Indonesia will be difficult if the new government is perceived to be unable to control the many factions in the political arena, including the powerful military.

Meanwhile, many local businessmen say the rupiah's currentappreciation is wreaking havoc on their enterprises. Sugarmanufacturers, for instance, are reporting that tons of theirproduct have remained unsold for weeks now. They say thegovernment's decision not to have any duties on imported sugarhas made matters worse. In Cirebon, West Java's sugarcane center, eight large sugarfactories have reportedly closed down while a 7,500-hectare fieldof sugarcane has been left rotting. Sugarcane growers who havemanaged to sell their harvests say they did so at a loss. Says oneCirebon sugarcane farmer: ''Sugar is supposed to be sweet. To usit tastes bitter."

The local sugar industry is not the only one suffering because ofthe rapid rise of the rupiah. Indonesian soybean farmers have alsobeen hit hard with the resumption of imports of the U.S. soybean,which used to take about 60 percent of the local market. Mustakim, a farmer in Sumedang, West Java, says he sold his 4.5-ton soybean harvest below production cost rather than to see it rot. ''My fellow farmers did the same thing,'' he says. ''We cannot compete with the U.S. soybean, which has better quality and much lower price."

Then there is the furniture and handicraft sector, which has alsoended up a victim of the recovering rupiah. Apparently, the costof the main material, teak wood, has yet to be adjusted andremains high. Waluyo, a furniture trader in Solo, Central Java, says thecurrency's appreciation has simply been ''too fast''. He adds thatthey are not producing the amount needed in order to offset thecost of the materials.

(Inter Press Service)

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