Andi Haswidi and Hendarsyah Tarmizi, Jakarta – It is still unclear whether the mistake was the finance minister's or the media's, but the recent remarks by Sri Mulyani appear to have put the chief economics minister and central bank governor into a serious spin.
Speaking during a press briefing Thursday, Finance Minister Mulyani said the current trend of high capital inflows and currency appreciation in Southeast Asia was similar to the situation that prevailed prior to the 1997 financial crisis.
The finance minister's remarks, which raised concerns that Indonesia might be on the verge of another financial meltdown, drew a quick response from Coordinating Minister for the Economy Boediono and Bank Indonesia Governor Burhanuddin Abdullah.
"We have reviewed the situation with the finance minister, Bank Indonesia governor and trade minister, and we have concluded that the country's economic fundamentals are quite solid," Boediono told reporters after a breakfast meeting at the Finance Ministry.
He stressed that there was no "imminent threat" to the Indonesian economy as all the economic indicators were strengthening.
Speaking to reporters separately following the briefing, which was also attended by the finance minister and Trade Minister Mari Pangestu, Central Bank Governor Burhanuddin said that given the prevailing economic indicators, there were no signs that the economy was weakening.
"All the economic indicators show that the chances that a repeat of the 1997 financial crisis will take place are quite remote," he said.
Although the finance minister said that her statement had been misunderstood, some economic analysts supported her comments.
Institute for Development of Economics and Finance director Iman Sugema, who is well-known for his criticism of the government's economic team, said that the current economic situation was actually graver than in 1997. "The amount of hot money is so massive, just wait until the crisis hits," he said as quoted by Detik news portal.
He argued that even though the government claimed that the country's economic fundamentals were in good shape, they were in reality worse than in 1997 as much of the short-term foreign funds were not invested in the real sector, making a quick exit even easier.
The fear of sudden capital flight is not totally unfounded. Recently, global rating agency Fitch Ratings said Indonesia's forex reserves – the lowest at present among the Southeast Asian nations after the Philippines – are a "worry" as they leave the economy vulnerable to capital flight.
Also, Bank Indonesia admitted last month the possibility of capital outflows of up to US$10 billion short-term foreign funds, made up of about $1.5 billion in foreign holdings of central bank bills, $5.5 billion in foreign holdings of government bonds and the remainder in foreign stock-market holdings.
However, BI argued that the country's total reserves of about $51 billion (far high than $17 billion prior to the 1997 crisis) should be big enough to withstand the pressure should the $10 billion in question suddenly take flight.
Another analyst, Aviliani, said that rising private sector debt could jeopardize the economy should the rupiah collapse against the US dollar. "The government must keep control of the foreign exchange rate. There has to be an early warning system for private sector debt," she said.
BI figures show that the private sector's offshore debt increased to $51.1 billion as of the end of December from $50 billion at the end of September, which stands in contrast to the decline in the country's sovereign debt to $74.1 billion as of the end of December from $83.3 billion at the end of March 2006.