A Glass Half-Full is Preferred to one Half-Empty

The rupiah depreciating beyond the Rp13,500 per US dollar threshold, and the disappointing second quarter growth result of 4.7 percent year on year, raises concerns on whether the economy will end up like the devastating Asian financial crisis back in 1997/98. This concern gets amplified as the rupiah exchange rate inches closer to the lowest point rate during the crisisRp14,000 per US dollarand what with foreign exchange reserves depleting, it will be more difficult to continue supporting the currency.

Several policies have already been issued to reduce the demand for US dollars. Earlier there was the requirement to price all domestic transactions in rupiah and a more recent import tariff hike to cut imports. However, these measures will take time to make an impact and with the current prolonged and severe drought, food prices and inflation could rise due to poor harvests. As a result, instead of a much-awaited interest rate cut, the government could be forced to raise interest rates to curb inflation and improve the attractiveness of the rupiah. This eventually would further slowdown the economy, which brings back fearful memories of 1997/98.

August 11, 2015