Great Forex-pectation (2)

(Continued)

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…!

Great Forex-pectation (1)

Puspa is back and now with people's high expectation on her expectation of foreign exchange. As I was told, many economists share Puspa's frustration: that you have to know things, no matter what. Many times, as a result, we see the so called 'pengamat ekonomi ' or economic observers says stupid things on TV, just because they can't say they don't know in response to the journalists' questions. Or, maybe because they don't know that they don't know. All questions are good, nonetheless. At least they get us thinking. Puspa knows that she doesn't know some things but she keeps thinking about them. She is sharing with us her experience with one case of currency-financial issue, in two pieces. Later, she will continue talking about this 'forex-tation' in the context of Asian crisis. You will see that she actually knows more than she thinks she doesn't know. Enjoy.
- Manager

What can one expect an economist, who happens to work in an institute that conducts ‘strategic’ and ‘international’ studies, to be able to say about the exchange rate and the likelihood of another crisis?

Sometimes, a lot more than what she can handle.

For some reason, I find that in Indonesia, people expect a lot out of economists. Peers, friends of friends, distant relatives, colleagues of parents, upon knowing (or insisting) that I am an (aspiring?) economist, would often pose interesting questions to me. Sometimes, personal queries come from phone calls, “ Hey, did you see the paper today? The Rupiah strengthened considerably…I think I am going to buy myself some (US) dollars now. But, wait…do you think that’s wise? Should I wait for a couple of more months? What’s the value gonna be in a few more months? “

Sounds like a normal ‘I-wanna-have-your-opinion-so-let’s-talk’ kind of question, no? But wait, it goes further, “What? You don’t know? Come on, don’t you have any leads as to what the exchange rate is going to be in 3-4 months? Dude, you’re working in a strategic institute, don’t tell me you don’t have any leads about the exchange rate?”

Mind you, owing to the fact that this institute’s name contains the word ‘strategic’, people sometimes expect great ideas from their economists, especially on foreign exchange…You know, like ‘Great Forex-pectations.’ ;-)

My reply was, “Dude, I cannot tell you what the exchange rate is going to be because : (a) the exchange rate is market determined and I’ll be damned if I claim to have perfect knowledge on how the market’s going to behave like and (b) if I can predict with utmost accuracy on exchange rate movements, I would be rich person already by now! Besides, I kind of subscribe to the view that exchange rate movements follow a random walk, and thus predicting would be pointless.

Still along the lines of currencies and financial issues, a few days ago, I received another spontaneous question ...

(To be continued...)

Understanding foreign exchange market

Lest forget I am not a macroeconomist and always have a hard time understanding the foreign exchange market. The behavior of foreign exchange market -- especially US Dollar -- in Indonesia is even more puzzling for me. Yesterday I went to the money changer to convert my remaining US Dollar into Rupiah.

The buying rate at that time was Rp9,010/US$. However, the rate was only for new, clean, unfolded and unmarked Dollar bills. If we are to exchange US$100 bills, there are additional rules: the bills should be new (printed in 2003 or after) with serial number beginning with the letter F. It turned out that my US$100 bills were new and unmarked, but either folded or do not have the F- serial number. The exchange rate for such bills was almost 100 points lower, RP8,925/US$.

My wife and I asked for an explanation. The guys in the money changer explained that they do so -- discriminating the exchange rate -- because the banks do so as well. OK, I understand that in the money changer's perspective, the banks are the demand for the foreign currency. The banks do so because the parties to whom they are supplying Dollar bills, people who are travelling to or importing goods, demand new and clean Dollar bills. But at the end, the end consumer would be US banks (or individuals). And for sure, in the US they don't care about the quality or the serial number of the Dollar bills.

Well, avoiding forged Dollar bills should be the best reason for such behavior. But I was thinking of another explanation: in Indonesia, US Dollar bills as it is seem to give direct utility for customers. So customers gain benefit from Dollar bills not only from its traditional role -- medium of exchange and store of wealth.

(Somehow, this behavior remains me of Immannuel Kant's das ding an sich philosophy).

Consumer behavior Utility Foreign exchange