Another Asian financial crisis?

The continuing fall of the rupiah against the US dollar and other major currencies is quite alarming although Finance Minister Chatib Basri and Bank Indonesia Governor Agus Martowardojo (who was Chatib’s predecessor as finance minister) have sought to play down concerns.

The two monetary officials insist that the rupiah depreciation is temporary and Indonesia is not alone as other Asian countries are also facing similar problems.

The central bank chief compared the rupiah to the currencies of neighboring countries. He, however, forgot, or chose not to remember, to compare Indonesia’s foreign exchange reserves with those of other countries.

“Our currency rate of Rp 10,000 [per dollar] is temporary. It is a rational rate. In 2005 and 2008, when the government raised the subsidized fuel price, the rupiah initially traded below 10,000 as well,” said Agus, who is also a former president director of the country’s largest bank by assets, Bank Mandiri.

Indonesia is facing a serious balance of payments deficit due to declining exports, massive capital outflows and the huge fuel subsidy, although the government finally raised the fuel price last month. Inflation may reach about 7.8 percent this year.

“If we can push down inflation as well as prevent our current account deficit from swelling excessively, then our currency will be stronger, said Agus on Wednesday.

On Tuesday, Indonesian Employers Association (Apindo) deputy chairman Anton Supit expressed concerns that the weakening rupiah would exceed the maximum limit tolerable by business players.

“What business really needs is rupiah stability, and while the key to that is the resilience of our economy, the government should also consider short-term measures to intervene,” Anton said.

China’s economic slowdown has been affecting its neighbors as the US economy has not fully recovered and European economies remain stagnant.

Perhaps Chatib and Agus would laugh if asked about the possibility of the reoccurrence of the Asian financial crisis, which devastated many Asian countries in 1997, including Indonesia, Thailand and South Korea. Many believe the financial disaster started in July 1997 when the Thai baht could not maintain its value against the greenback. At that time then president Soeharto was very confident that the rupiah would not be affected because “our economic fundamentals are very solid”. His claim was also initially backed by the World Bank, the Asian Development Bank and the International Monetary Fund (IMF).

A few months later the government had to bow to IMF pressure to take harsh measures against the country’s banking industry, closing 16 banks, including the bank owned by Soeharto’s own children. In May 1998, Soeharto stepped down, and it took a few years before Indonesia was eventually fully discharged from IMF supervision. Editorial, Jakarta Post