Nick Edwards, Jakarta – Mounting social unrest in Indonesia has scared more skittish capital out of the crippled economy, felling the rupiah and dashing faint hopes of recovery.
The currency was making a strong comeback against the US dollar, offering a glimmer of economic hope, when clashes between security forces and students demanding the ouster of President B.J. Habibie spooked foreign investors, financial analysts said.
The clashes, in the early hours of Tuesday, sent the rupiah into a nosedive to as low as 12,300 to the dollar, from Monday's close of 10,800. The plunge shredded investor confidence.
"I think foreigners are taking a look at what's been going on here in the last day or so and saying 'forget about it'," Tom Inglis, head of research with ING Barings Securities in Jakarta, told Reuters. "With the situation like it is, I don't think we'll see any big foreign investors coming back in," said Distri Damayanti, an economist with Citibank.
"People onshore and offshore are looking at this political instability and are unnerved by it. They see more potential for political instability than economic recovery," she added.
Hopes had been building that the long-awaited recovery of the rupiah – the springboard for economic recovery – had begun and would help entice foreign investors back into Indonesia. But social tension has also been building because of spiralling prices, food shortages and the real prospect that two thirds of Indonesia's 200 million-strong population could be living below the poverty line by the end of 1999.
Fears of instability sent the rupiah through the 12,000 barrier to the dollar early on Wednesday, reversing gains of as much as 29 percent against the greenback since July. Analysts last week were talking of a test of the 10,000 level to the dollar – the official government and IMF target for the year's end – but on Wednesday were looking to 13,000 instead.
The return of the rupiah to a stable and sustainable rate is crucial for Indonesian firms that face crushing foreign debts of US$80 billion and domestic interest rates of about 70 percent. Rates will not fall until the rupiah stabilises. Hundreds of firms face the spectre of liquidation under a new bankruptcy law, the Jakarta stock exchange is about half its July 1997 level and analysts likened share trading to gambling. "Even at 10,000 to the dollar, most Indonesian companies are facing bankruptcy, but at least they would be better there than at 12,000," one local analyst said.
Others said hopes for economic recovery worsened with every outbreak of violence. "As social tension escalates, it is very difficult to have successful economic restructuring because attention is diverted to talking about political issues, not economic ones," Citibank's Distri said.
"These protests confirm the view that fundamentals have not changed and are unlikely to in the near future," said Jimmy Koh, an economist with markets consultancy I.D.E.A. in Singapore.
"Banking and corporate restructuring is extremely slow, INDRA (the Indonesian Debt Restructuring Agency) is not working and the economy remains in a fragile condition," he said. "Those that had been considering coming back have turned away again. It would be a brave man who invests in Indonesia today," said ING Barings' Inglis.