Jay Solomon, Jakarta – The rupiah's continuing plunge is exposing rifts inside President Abdurrahman Wahid's government and eroding confidence among many Indonesians in the country's economic prospects.
Last week the rupiah lost as much as 9% of its value against the US dollar and provoked chaotic scenes reminiscent of the financial crisis that hit this country in 1998. Currency traders initially attributed the sell-off in the rupiah to expected interest-rate increases in the US and concern over the slow pace of Indonesia's economic restructuring.
But panic selling eventually spread through the market Friday as the Indonesian currency plummeted against the dollar from its opening level of 8,390. Currency traders also sold down the baht and peso, as Indonesia's woes affected regional sentiment.
Unwelcome reminders
"It's just like January 1998, as people are just following the crowd" and dumping the rupiah for dollars, said the head of treasury at a US bank in Jakarta. In early 1998, the rupiah for the first time fell through the 10,000 level against the dollar, setting off food riots in the capital and calls for former President Suharto's resignation. On Friday, the rupiah fell to almost 8,800 against the dollar before state banks supported the currency by selling their own dollars. The rupiah closed the day at 8,290 against the dollar.
Mr. Wahid said late Friday that his government might continue intervening in the market to support the rupiah should selling pressure continue this week. But central-bank Gov. Sjahril Sabirin said such intervention would only take place if "we think it can be effective." Some currency market analysts doubt that it would. They believe the rupiah could again test 9,000 against the dollar in coming weeks, as local corporate demand for dollars remains strong and overseas investor interest in Indonesia is tepid.
Sentiment also may be hurt, at least temporarily, by an outbreak of rioting in a Jakarta commercial district over the weekend. The violence was quickly suppressed, but it was an unwelcome reminder of Indonesia's vulnerability to social and political unrest.
The rupiah's weakness caught many in Mr. Wahid's government off- guard, as Indonesia had released a slew of strong of economic and corporate indicators in recent weeks. The country's economy is expected to grow nearly 6% during the first quarter of 2000 from the same period last year, while interest rates are low and inflation remains tame. The central bank's foreign-currency reserves also have been rising and Indonesia's export sales have shown an improving trend. Government officials fear an interest- rate boost may now be needed to support the rupiah.
"The economic fundamentals look very good right now," said Indonesia's top economic minister, Kwik Kian Gie, who, in an interview, expressed his own confusion over the rupiah's slide. He added that Jakarta's anticipated agreement with the International Monetary Fund to release $400 million in new loans to the country, and a pact with foreign lenders to restructure almost $6 billion in sovereign debts had been expected to underpin the rupiah.
Outspoken Official Mr. Kwik himself, however, has exacerbated the rupiah's woes. Media statements he made last week questioning Indonesia's investment climate roiled the country's financial markets. Mr. Kwik continues to hold this view. While stressing that he's not against foreign investment, Indonesia's economic czar said he understands "why in this current environment foreign investors would be wary" of putting money into Indonesia because of political uncertainty. Mr. Kwik said the country is still changing its business culture from that of the corrupt and crony-ridden Suharto era to a more democratic and equitable system. That process "would take time," he said.
Mr. Kwik contended that Indonesia's new openness was preventing a recurrence of past abuses. He noted, in particular, that attempts to set up monopolies or misuse state funds were far more likely to be exposed than they were under Mr. Suharto. But he cautioned that "Indonesians are still learning how to make democracy work." Mr. Kwik's outspokenness has fueled speculation of growing rifts between himself, Mr. Wahid and other senior government officials. In recent months, the president has created an array of advisory groups on economic policy that are seen eroding Mr. Kwik's power and muddling policy implementation.
Indeed, government advisers describe a situation of not knowing from day to day which official or agency will hold sway over economic reform. Earlier this month, Mr. Wahid named two more advisers to oversee economic policy.
Mr. Kwik denied the widening bureaucracy was hampering his work, but he did question whether it was helping Mr. Wahid's own performance. The president said earlier this month that he would personally take charge of economic affairs after government bungling forced the IMF to delay in March disbursing its $400 million in loans. He sacked two of his ministers following the standoff, fueling speculation that Mr. Kwik would be next. On Friday, Mr. Wahid reaffirmed his support for his senior economics minister.
Unrest mars progress
But Mr. Wahid is coming under increasing fire. His appointment of his brother as an adviser to the Indonesian Bank Restructuring Agency has prompted charges of cronyism. And an attack by the president's political supporters on an Indonesian newspaper that criticized Mr. Wahid has stoked accusations that he's leading by mob rule. Mr. Wahid said he never incited his supporters to disrupt the paper's operations.
Mr. Wahid did score one success last week with the signing of a truce between his government and Islamic rebel groups in troubled Aceh province, where a stubborn separatist movement has plagued the central government. A peaceful resolution to the Aceh problem is seen as one of the president's top domestic challenges.
Still, that progress was tainted by renewed raucous student protests and a separate outbreak of rioting in Jakarta over the weekend that reminded the public of the citywide unrest that unseated Mr. Suharto two years ago.