Thursday, July 12, 2007

Great Forex-pectation (2)


Still along the lines of currencies and financial issues, a few days ago, I received another spontaneous question (during a wedding reception, of all places), “Is it true, what they’ve been saying, that there’s going to be another financial crisis? Isn’t one unfolding in Thailand right now, as we speak? Is it going to have a contagious effect again, thus spreading to Indonesia? What if the exchange rate shoots up to 20.000 IDR per USD? ”

Interestingly, this particular query hailed from someone who is an importer of sorts. To my understanding, she is about to sign a purchase order contract for a few years with a foreign supplier, but is concerned that the imported products might not sell very well at home, if there is a crisis that would prompt a significant increase in the prices of these particular goods.

To be honest, I had no ‘well-rehearsed’ analytical and comprehensive response to her query. This past year, my research mostly dwells on trade and regionalism issues, so yes, I’m a little rusty on my finance and monetary. Yet I still had the audacity to confidently respond to her, “No, Tante, I wouldn’t trust the ‘rumors’ so much. True, no one has control over financial crises, in fact history has shown that the financial crises-triggered panic are over the world [I was thinking of Charles Kindleberger’s classic: Manias, Panics, and Crashes : A History of Financial Crises], yet I would not bank on another crisis of a similar magnitude and depth as that of 1998. Yes, [short-term] shocks could happen, but as of this moment, I do not see that there is anything to worry about.” I paused for a moment, ”Not yet, at least!”

I based my argument mainly on two assertions/observations: (1) Macro and finance indicators suggest that Indonesia is now less vulnerable and (2) Authorities are now better equipped to deal with the crisis. A lot of (IMF-induced) financial reforms have taken place to restore the banking and finance sector, as well as set the scene for a more salient and prudent regulatory regime. Furthermore, East Asian countries have stepped up regional financial cooperation within the spirit of preventing the recurrence of the 1997/98 events. The crisis, interestingly, prompted a strengthening in the wave of regional financial cooperation. A lot has been discussed at the ASEAN Plus 3 (ASEAN + Japan, China and South Korea) Finance Ministers Level. A notable one would include a mulilateralization of Bilateral SWAP Arrangements known as the Chiang Mai Initiative (see here). ASEAN Plus Three Finance Ministers supported the idea of pooling their reserves as some kind of stand-by arrangements. The idea is that in the event of a liquidity crisis in a particular country, each central bank, according to how much it pledges, will release the funds to help the country experiencing liquidity problems.

Besides, I added, even if there is going to be another financial shock/crisis, the Rupiah would not depreciate by the same magnitude as it did in 1998. The pre-crisis level of 2,500 IDR per USD was undoubtedly undervalued overvalued, while the current level of 8,900-9,200 seems to reflect the ‘equilibrium’ more. Adjustments, if any, would not be as grave as before.

This particular query, delivered while I was ‘elegantly’ munching away on Poffertjes at the wedding, had the predicted effect of triggering my curiosity. Later on that night, when my mind was more free to contemplate, I thought more about all these currencies and crisis issue. Curiosity nearly killed the cat. I got to thinking, what lies behind all this recent worries about the likelihood of another crisis? Why now, ironically, when the region in growing again, such that it has been touted as the fastest growing region in the world (see Eichengreen’s commentary here)? What exactly is happening in Thailand right now? What are the financial and prudential indicators like: are we exhibiting signs of vulnerability? Are there signs that the fundamental macroeconomic and monetary conditions that preceded the 1997 crisis are now recurring?

An attempt to answer the above, and some insights on lessons-learnt from the Asian Crisis, are coming your way…Stay tuned…!


  1. The next crisis you say?? To quote one of my American friends, "Those damn Chinese!":D

    But seriously, I think the role of economist in Indonesia has been reduced to only commenting on exchange rate, inflation, interest rates and growth by the media. IMO, the media has to be educated that economics is not just about exchange rate or inflation. How to do that? Beats the crap out of me.

  2. Folks, I'm afraid I made a mistake here...

    "Besides, I added,...... The pre-crisis level of 2,500 IDR per USD was undoubtedly undervalued, while the current level of 8,900-9,200 seems to reflect the ‘equilibrium’ more"

    The word "undervalued" should be replaced by "overvalued," As one US Dollar back in 1996-97 was seen to be worth more than 2500 IDR, then the text should actually read the Rupiah was overvalued, instead of undervalued.

    Sincere apologies,
    -the rusty monetary economist ;-)

  3. Congrats Puspa... you just remind me to read more about recent news rather than those long pages of Investment Law and its derivatives... is not easy being an economist i supposed?

    anyhoo... can someone explain to my dad why the macroeconomic indicators showed a outstanding performance while newspapers and media (yes, newspapers and media) and some other people claimed that Indonesia's currently face a chaos situation? I've tried explain things to him the way the cafe-goers will but somehow i managed to make him believe that he'd better spend my education trust fund somewhere else... HELP!!!

  4. Puspa, I will make the correction for you, don't worry :-)

    dHani, send your papa here :-)

  5. Saya hanya ingi bertanya mengapa APE belum mengambil doktor hingga saat ini? Apa sedang menunggu ke AS lagi?

  6. Since the 97 Asian Crisis particularly after 2000, most of Asian currencies have been stabilised in a desired level. Please check the graphs of those currencies from 87 until today. 97 is kind of a strong pulse. Now is a good sign for those currencies to be one currency. Similar with European currencies before they became Euro. Most of European currencies had been stabilised in a desired level prior to Euro.

  7. > Saya hanya ingi bertanya mengapa APE belum mengambil doktor hingga saat ini?

    Ah, good question. I wish I knew the answer. Possibly:
    - it's the universities. They don't know what they're missing.
    - it's me. I'm just plain crap to get in.
    They can't be both correct, can't they?

  8. Yah, Harvard or MIT terbatasi oleh bounded rationality padahal possibly jika APE ada di uni2 tersebut, akan melebihi Posner or even Becker. Atjo will knee to you.

  9. anymatters, I don't think currencies of several countries in a region stabilizing are a strong enough basis for them to become a single currency...

  10. I think a stable rate is a good start. Imagine a currency called "ASD" to be rated initially ASD1 = USD1 . If USD/IDR stable level = 10,000 - 8,000 and USD/MYR = 3.3 - 3.5, then to mix both currencies it should be ASN/IDR at 9,000 and ASN/MYR at 3.4 (the mean). Nothing we can do if USD/IDR is between 2,000 - 15,000 or USD/MYR between 2.5 - 4.7.

    It's just a currency anyway, not a tax policy etc.

  11. I've been forced to follow a workshop series of Asian Financial Architecture and Integration during the past 6 years. Hell, it's boring and exciting at the same time. I agree with Puspa, it still has a long way to go to reach single currency, given various socio-political-economic levels of the countries of ASEAN Plus.
    Single currency means that you must give up your monetary independence. Imagine how difficult for socialist countries, democratic countries, and mixed-system countries (confused countries hehe..) to faithfully submit to an Asian Central Bank? Sorry, a bit OOT.

  12. Er, what exactly is unfolding in Thailand right now?
    I mean, besides the obvious strengthening of the Baht.
    Seriously, are there any other indicators that I may be unaware of?

  13. I don't care about the political crap. People just want a no-hassle single currency. Too hassle to trade with or travel to KL from Medan (to Kuching from Pontianak) if we have to change the currency, compared to Makassar or Surabaya.

  14. People may not care about politics, but to materialize single currency, "no-hassle thing" is not the only consideration. EU needed three decades of erratic and laborious process to reach existing Euro.
    Except we're only talking about dream.

  15. If Euro needed three decades, so then just follow its way in a shorter time period. It's easier to follow an example.

  16. Maybe it's easier to follow example but not always the case. Consider the fundamental differences between Asian and European, I think we face much more complex situation.
    Look at the economic stage of ASEAN Plus: Myanmar v. Japan, Indonesia v. Singapore, etc. Look at monetary system between China v. Thailand, Korea v. Laos, etc.
    To have single currency each country should give up its monetary independence and embrace the same system. Single currency will also lead to the economic integration. There, more complicated problems needed to be tackled.

  17. Is there any such a thing as a monetary independence nowadays? 97 Asian Crisis had proved it. Domino effect? "Asian" not "Korean" or "Thailand" Crisis. Any interest movement in the US may impact other currencies or countries' interests. And so on.

  18. ^up
    you're talking about different thing. In reality, every country will be reluctant to give up its monetary policies and submit to regional Central Bank.

    Even though ASEAN Plus have been working on this issues since the crisis (there are regular meetings every month), everybody admits that having single-currency is still far.

    @manager and puspa:
    sorry, this is OOT. I'd better stop here.

  19. no worries, Fau, it's not totally OOT anyways!
    But good to hear you've followed closely the ASEAN Plus Three's debacle overthe past years.Can I pick up your brains some time?;-)

  20. @puspa
    I'm far from brains in this issue. I'm just penggembira :)

    Now, this is real OOT from me (@manager: sorry): how are you? I think the last time we met was years ago (with patrice, having full-cholesterol dinner around Cikini after "that funny exercise"). :D don't know whether you still remember it.

  21. hihihi...can't believe you still remember THAT!;-) I'm doing well, mbak, still doing interesting excercise and drowning it down with greasy-food! ;-)
    Good to touch base with you again!
    (Sorrieee, Ma'am Manager for the irrelevance of these exchange of comments!)