Commentary: Indonesia hits the panic button over the rupiah
Restoring calm to the country’s financial markets will require a more definitive step, say Daniel Moss and Karishma Vaswani for Bloomberg Opinion.
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SINAGPORE: Indonesia has declared what amounts to an emergency over its embattled currency. The shock interest-rate increase this week has given the rupiah a short-term lift. Without a change in the underlying direction of government policy, it will be insufficient to revive confidence.
Restoring calm to financial markets will require a more definitive step, one that President Prabowo Subianto will be reluctant to take. The former Special Forces general needs to alter the populist approach to economic and social development that he’s adopted since becoming leader in 2024.
That means fewer grandiose projects, a renewed and credible commitment to long-standing budget rules – and dialling back some of the strongman measures that have undermined social stability.
The quarter-point hike in the central bank’s main rate won’t be the last. We’ve have been anticipating steeper borrowing costs since the last policy meeting announced a jumbo hike a few weeks ago; higher energy prices stemming from the Iran war are pushing inflation higher in almost every economy, and Indonesia is no different.
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What was surprising about Tuesday’s move was that it came between Bank Indonesia gatherings – and a day after a top official denied special arrangements were afoot.
Unscheduled moves are never a good sign. They suggest officials are scrambling to keep up with market slides or a rapid shifts in economic prospects. The rupiah has been frequently plumbing record lows against the dollar, a slump that’s deepened in the past few weeks. It has lost almost 8 per cent this year, the worst performer in the region. Investors are also unloading bonds. This is a market under siege.
INVESTORS RATTLED
Prabowo’s team has rolled out a series of policies that have rattled investors.
In the past month alone, the government has moved to take control of lucrative commodity exports and made it harder for citizens to change rupiah to dollars. The parliament was granted authority to scrutinise the central bank’s performance, a move that could undermine its ability to fight inflation. And the head of the organisation established to oversee Prabowo’s signature – and expensive – school meals program was fired amid allegations of corruption and mass food poisoning. Confidence was earlier sapped by the president’s nephew being installed as deputy governor of Bank Indonesia.
Prabowo may also be bracing for public unrest over this building economic disaster, and he’s relying on institutions he knows best: The military and police. On Tuesday, parliament revised the national police law to allow officers to legally hold civilian administrative positions, heralding a greater role for them in government. Last year, authorities fast-tracked legislation that allowed more active-duty officers to take government posts.
After long-time ruler Suharto was toppled in street protests in 1998, Indonesians worked hard to remove the security apparatus from civilian life. Prabowo has since turned to the army and police to implement his flagship initiatives, including his free school lunch program. This has meant the deployment of tens of thousands of troops across the vast archipelago, who will provide a convenient tool in the event of instability.
Indonesians don’t want security services in public life, and their recent behaviour is hardly cause for comfort. Calls for shoot-on-sight policies to combat crime and persistent allegations of excessive force have only heightened fears.
WHAT INDONESIA NEEDS
It’s important that Prabowo has an economic team that’s taken seriously by the markets. He made a big mistake firing Finance Minister Sri Mulyani Indrawati in September. The former World Bank executive was a reassuring presence in the cabinet of former President Joko Widodo and during the first rocky months of Prabowo’s term. Whenever markets wobbled, she was there to insist that spending rules would be upheld, along with central bank autonomy. He should consider recalling her.
Purbaya Yudhi Sadewa, her successor, doesn’t have the same cachet. He wasted critical capital in his early months by picking a fight with a Citigroup economist who made bearish comments on Indonesia’s finances. This shoot-the-messenger response is unbecoming of a government minister.
It’s not too late to fundamentally change course. For all the currency’s weakness and the dramatic steps from Bank Indonesia, a lot more would have to go wrong to replicate the enduring collapse of the 1997-1998 Asian financial crisis. The rupiah’s value was shredded, Suharto was forced out, and years of communal violence and terrorism followed.
Army brass are trained to be decisive. In the battlefield of capital markets, this could be a great opportunity to regroup. Prabowo just needs to rise to the occasion.
Source: Bloomberg/zw(sk)
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