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Indonesia on edge of hyperinflation

Source
The Age - January 23, 1998

Louise Willliams, Jakarta – Indonesia is facing the threat of hyperinflation after the rupiah plunged for a third day amid warnings of more price increases and rising social tension.

A senior Indonesian economist, Ms Marie Pangestu, said the currency's collapse was one of the most dramatic of any post-war economy.

The rupiah today plunged to 16,000 against the US dollar, down from about 10,000 yesterday, meaning its value has fallen more than 80 per cent since mid-1997.

"We have to address what is causing the rupiah to behave in this way," Ms Pangestu said. "We have a very comprehensive IMF package so we must conclude that the market does not believe in the full implementation of the package and is very nervous about the (political) leadership."

An internal document prepared by a major American investment bank, which was circulating in the financial community, said: "The rupiah is now a gaping black hole, there is no alternative other than the probably violent overthrow of the Government."

Last week the International Monetary Fund arranged a second bailout package, which delivered significant economic reform, including curbs on the business ambitions of President Suharto's family.

But it was unable to restore confidence in the economy, which suggests that investors believe the only option left for economic salvation is political reform, including the departure of Mr Suharto.

About 100 protesters waving anti-Suharto banners marched on the parliament this morning and a group of government-employed researchers called for him to step down.

Foreign companies are discussing the crisis with expatriate workers, against the backdrop of social tension and resentment against foreigners paid in valuable US dollars.

The rupiah's latest fall began after Mr Suharto confirmed he would stand for a seventh five-year term and fuelled rumors that his friend, the Technology Minister, Dr Jusuf Habibe, would become vice-president. Dr Habibe is unpopular with the armed forces and is not considered a good economic manager. Mr Bruce Rolph, head of equities at Bahana Securities, said of the rupiah: "At around 15,000 to the dollar, many commentators are concerned about the potential for this slide to tip over into a hyperinflationary period, which would clearly have significant implications for the economy and society."

He said the currency could still buy essential food supplies. But the level of confusion in business means some companies may choose to shut down rather than deal with rapidly rising import costs.

There were no reports of panic buying in major cities today - after the rush on shops two weeks ago.

But Ms Pangestu forecast further turmoil. "You will see a variety of responses. You may see another round of panic buying. Small shopkeepers don't know how to set prices. There might be hoarding or very high prices. The likely social impact is increased social tension."

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