Why BI must defend the rupiah Will Hickey  ;  Associate professor and capability advisor for the School of Government and Public Policy in Jakarta

JAKARTA POST, 19 Maret 2015

                                                                                                                                     

                                                                                                                                                           

Indonesia’s incipient devaluation is starting to really bite, and the refusal by Bank Indonesia (BI) to defend the currency, will have real costs to the people. The rupiah hit Rp 13,200 on Monday and the currency is now plumbing 17 year lows, not seen since the 1998 financial crisis. A weakening currency will be no panacea to Indonesia’s masses, in fact it will bring more misery. Indonesia is not the only country suffering with this under the rise of “King Dollar”, but is one of the few most susceptible to capital outflows due to slowing growth and a perception among international investors (rightly) that BI will not stop the downtrend. Just a few months ago the media and politicians where high-fiving the consumer fuel subsidy cut, with promises of better budgetary balances and less drain on government coffers. Then oil prices crashed, effectively neutralizing the fuel subsidy issue in the immediacy. But the rupiah has kept falling. Where was all this vast savings people were led to believe to shore up government coffers, and by extension the rupiah? It never materialized. If the currency is collapsing with falling oil prices and no subsidy, what will happen when oil prices do rebound? Oil is priced in dollar, and prices will filter back into the system by way of larger amounts of a weakening rupiah needed to pay these bills. Nonetheless, salaries are slow to respond in real time to these increases. What economists call “sticky wages”, is a technical way of saying “your salary won’t be able to cover your real expenses”. In an inflationary environment, the people at the bottom of the ladder will be hit the hardest with this musical chair charade as higher costs are always passed down the chain to the lowest common denominator. In this case the blue collar working people, students and rural farmers in Indonesia. Why are these things percolating through the system so quickly? The fact is most Indonesia bond subscriptions (that is loans from foreign investors) for infrastructure, construction and government debts, such as for freeways, subways, airports, shopping malls and even basement parking lots are subscribed to in dollars. Since everyone needs transportation for goods, services and getting to work, these costs ultimately fall on them. They also need housing, food and consumer goods, and in the latter cases, if foreign made, the import prices were all in dollars at some point. This also means, and is a crucial point, that any politically ambitious infrastructure projects, depending on foreign technology or content and priced in dollars, amidst a declining rupiah and BI lowering rates, will present a suffocating cost structure on the ultimate payors of these projects: Indonesian citizens. While domestic contracts may be nominally posted in rupiah (so called “local currency” contracts) at the point of the transaction to meet Indonesia legal tender requirements, any local currency transaction with weak a forward market will be reflected in a higher nominal rate at the point of transaction past market prices, such as for buying a house. Meaning sellers will demand a higher rupiah exchange rate than the current spot exchange rate. No one is being fooled on any of this. Car prices, resort villa’s in Bali, Gucci bags, and iPhone’s are all priced in dollar. Ask any shop attendant selling foreign made products in Paris van Java in Bandung the price, and usually it is not fixed. They will have to scurry to a back room for a daily printout of moving prices in rupiah. This is odious for the fourth largest country in the world to say the least. It means Indonesians don’t trust and can’t rely on their own currency. The government must be held responsible for this issue, in particular the central bank, as the people cannot be held hostage to a foreign countries economic policy, in this case US monetary policy with the threat of increasing rates, while its own central bank is lowering rates. Devaluation or depreciation, whatever you want to call it, should not be on the backs of the everyday man. Unfortunately it is, but it’s not right and any populist leadership needs to make things right by supporting the domestic currency, not abdicating to foreign central banks priorities thousands of kilometers away. What is happening is that by not intervening, BI at its core is letting Indonesian structural deficiencies be placed on the shoulders of the common man. Maintaining a stable exchange rate requires keeping reserves. But it is easier to let foreign exchange dwindle and watch the rupiah slide, than it is to tackle structural issues domestically, due to a lack of Indonesian engineers, contractors and local resources billing in rupiah. Ideally Indonesia should not be relying on the monetary policy of a foreign country to set their domestic policy, but unfortunately, in the world of a rising King Dollar and “proper” reserve currencies, that is exactly what is happening. ●