Friday, April 29, 2005

The case against the rupiah

Yesterday President Susilo Bambang Yudhoyono tried to calm the society saying there is no fundamental reason for the downfall of the rupiah. He said he believes the rupiah will be stable like old days again. (But at which level?) Noted economist Faisal Basri even downplayed the recent rupiah depreciation saying it is just a cyclical and non-systemic situation.

Statistics show that our exchange rate was stable in the range of Rp8300 to Rp8600 only in the period of mid-2003 until April 2004. However, the rising price of oil and stronger demand for dollars put downward pressures on the rupiah since then, making it the weakest-performing currency in Asia. The weaker rupiah and rising global oil prices exerts upward pressures on consumer prices through import of fuels, foods, other commodities, and especially raw materials and machineries.

Surely this is the fundamental problem that results from our failure to lure in new investments, not just export-oriented but import-substitution industries as well. It would be naïve say the whole economy is better so we have nothing to worry or to say the recent rupiah fall as a mere cyclical trend.

It is clear that our economic fundaments are weak still and always subject to international pressures. Look at oil statistics. In January-February 2005, Indonesia booked a deficit of US$771 million in oil trading (export less than import), more than double the numbers in the same period last year of US$331 million. The real effect of higher oil price will be in the next few months, especially with higher prices for raw materials for export-oriented manufacturers.
It is true that in the period non-oil and gas exports increased almost 31%. But increasing prices for mining products was the key reason -- a vulnerable gain. If we look at the manufacturing sector, exports increased 23.8%, while material goods imports also increased significantly -- by almost 18%.

Since most of our export-oriented manufacturers are heavily reliant on imported raw materials, the margin will be squeezed along with the increasing oil price.

Data released by the Investment Coordinating Board (BKPM) last month actually give some hopes. The agency reported a 293% surge in new investment licenses for foreign direct investment. The problem is the time lag between licensing and when investment materializes. It could take years, mainly because of poor bureaucracy in all branches of government.

We can’t just discount these fundamental problems to hope for a stronger rupiah.

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