Once again, the Indonesian rupiah depreciated beyond the IDR 13,500 per US dollar level on Wednesday (05/08), touching its weakest level since the Asian Financial Crisis (which began as a financial crisis but would soon develop into a deep economic, political and social crisis in Indonesia) in 1997-1998. For some Indonesian policy makers, business players and investors the current weak rupiah therefore brings back bad memories. However, there are significant changes between conditions now and those in 1997-1998.
By 11:14 am local Jakarta time, the rupiah had depreciated 0.23 percent to IDR 13,503 per US dollar based on the Bloomberg Dollar Index. Meanwhile, Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.16 percent to IDR 13,517 per US dollar on Wednesday (05/08).
Indonesian Rupiah versus US Dollar (JISDOR):| Source: Bank Indonesia
One important difference between the situation now and back in 1997-1998 is that present currency weakness is not caused by a contagion effect (stemming from Thailand) confined to specific Asian economies only. Instead, presently, the US dollar has bullish momentum causing basically all global currencies to weaken. Such momentum is caused by the tighter monetary policy approach of the US Federal Reserve as it cancelled its generous quantitative easing program at the start of 2014 and is now expected to raise its interest rate environment before the year-end. The decision to raise US interest rates is data-dependent and therefore each time positive US economic data are released the rupiah is bound to depreciate as markets’ expectation of a US interest rate hike rises. For example, today (05/08), the rupiah weakened due to US June factory orders rising above expectation (after two months of declines).
Indeed, the tighter monetary approach in the USA has resulted (and will result) in capital outflows from emerging economies, including Indonesia, as the era of ‘cheap US dollars’ ends and with higher yields in the USA, once lucrative (yet riskier) assets in emerging markets become less attractive. But, the difference between now and 1997-1998 is that Indonesia’s financial and economic conditions are much stronger.
The macroeconomic fundamentals of Indonesia are now much stronger than they were around the period of the Asian Financial Crisis in the late 1990s and therefore it is important to understand how Indonesia’s political and economic context was in the 1990s. During the authoritarian New Order regime of former President Suharto (1966-1998) the country’s financial sector was in a terrible state due to the culture of patronage and corruption (and therefore this sector was at the heart of the crisis). Indonesia’s financial sector lacked a decent supervision model. In fact, even the central bank had no clue about domestic and foreign money flows. This resulted in huge short-term privately-held foreign debt hence causing a bubbling economy. This foreign debt, becoming more massive due to the weakening rupiah, would kill many local businesses.
The culture of patronage, corruption and lack of legal certainty, nurtured by the New Order government, seriously hampered the functioning of an efficient economy and became a time bomb waiting to explode. The current situation in Indonesia is markedly different. Supervision on liquidity of the banking sector is now relatively strict and transparent, while the rupiah floats relatively freely (meaning that pressures on the rupiah are continuously and immediately absorbed).
A key difference is that Indonesia’s debt-to-GDP ratio is now much lower than in the late 1990s. Currently, Indonesia is among the nations with the healthiest debt-to-GDP ratios across the globe at approximately 27 percent. Around the time of the Asian Financial Crisis this ratio was over 60 percent.
Another difference is that Indonesia’s foreign exchange (forex) reserves are now much higher. At the end of June 2015, Bank Indonesia’s forex reserves stood at USD $108 billion, nearly ten times higher than in the late 1990s.
We can also take a look at 2008 to know how Indonesia responded to a crisis situation. Indonesia underwent the global crisis in 2008 relatively easy. Indeed a large outflow of money was seen again but due to the country’s stable economy and stronger financial fundamentals, Indonesia still managed to post robust growth with GDP growth at 4.6 percent (y/y). In 1998, the country’s economy had contracted by a staggering 13.6 percent (y/y). Currently, Indonesia’s economy has slowed to a six-year low (which is indeed worrying) but with GDP growth forecasts hovering around +5 percent in the near to middle term future, economic growth is still strong.