Gary LaMoshi, Denpasar – 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."