TEMPO.CO, Jakarta - While we should not underestimate the weakening rupiah, we must also refrain from creating panic, because this will cause an adverse reaction in the market. The rupiah depreciation to the US dollar is small compared to other currencies, but even so, the weakening rupiah can cause serious problems. The government's eight measures to stabilize the rupiah last week seem to have been effective, but a follow-up step is still needed. One step would be to reduce the trade deficit.
Compared to the 1998 economic crisis, conditions today are far better. The banking sector is not in a mess, inflation is under control. In February, it was down from 7 percent in January to 6.3 percent. The stock market remained active despite the rupiah having broken the Rp13,000 barrier. Even interest rates on government notes declined from 6.4 to 6.3. This explains why the rupiah depreciation towards the dollar is classified as listed as a mere 4.69 percent. In comparison, the Australian dollar slid by 6.38 percent and the euro by 12.36.
All these indicators show that the weakening rupiah is caused more by global factors. But we must not close our eyes to the domestic economic factor, which needs serious attention. One concern is the increasing current deficit. It's been on the rise since 2012, reaching US$24.418 billion and last year it was US$26.233 billion, or 2.95 percent of GDP.
To prevent the deficit from sliding even further, the government must accelerate commodities exports, in particular from the manufacturing sector. We must learn from Thailand, which was able to push exports from the manufacturing sector up by 59 percent of their total exports. In our case, it's only been 15 percent.
Improving exports should be our priority. The measures to stabilize the rupiah, one of them providing tax incentives to export-oriented local industries, is the right thing to do. But there must be serious attempts to improve the investment climate, such as resolving the problem of illegal levies and hidden costs.
Those extra costs are ruining the investment climate. The Indonesian Employers Association (Apindo) claims that hidden expenses can reach 14 percent of total production costs. Labor costs come to only 11-12 percent of total expenses. It's pointless to accelerate exports if domestic policies cannot be controlled. Policies to stabilize the rupiah must be followed by serious attempts to reform the bureaucracy.
What also needs to be done is maintain the balance of supply and demand of US dollars. This is not easy given the declining value of exports, yet foreign exchange is needed to import much-needed fuel. So President Jokowi's infrastructure projects using US dollars must be reviewed and its dollar expenses better prioritized. Additionally, overseas loans held by state-owned and private companies had reached US$29.4 4 billion in October, and will continue to rise. Clearly, the demand for dollars must be controlled.
If these positive steps are taken, the market will see that the government is still in control despite the plunging rupiah. That sign is important to prevent speculations that can trigger panic. (*)
