JAKARTA, Indonesia (The Jakarta Post/ANN) - Watching the rupiah fall over the past few months to as low as 14,000 to the US dollar and the financial turbulence in most other emerging economies, notably China, we cannot help but wonder whether we are in for another 2008 financial crisis.
Watching the rupiah fall over the past few months to as low as 14,000 to the US dollar and the financial turbulence in most other emerging economies, notably China, we cannot help but wonder whether we are in for another 2008 financial crisis. Even some big businesses have invoked the comparison. There are indeed some unsettling parallels between the 2008 global financial crisis that started in the United States and what is happening now.
But we share the prognosis of most analysts, which happens to be strongly backed up by the key macroeconomic data released by the government that the economic fundamentals and the financial market conditions are much stronger now. Our debt ratios to gross domestic product and to foreign reserves are much lower. Our banking industry is now stronger, better capitalised and supervised in an integrated manner by the Financial Services Authority.
Moreover, the government is better prepared to cope with the financial stresses, unlike the fallout from the 2008 global financial crisis that caught the government rather off guard.
Having said all that, we don’t mean we should simply sit back, relax and feel complacent. Instead, as the government has repeatedly assured the public, it is now working to strengthen economic resilience by removing major barriers to state budget implementation and private investment. For example, the government has listed more than 150 regulations for reform within the next few days as they are inimical to investment and business operations.
The weakening rupiah has indeed been eroding the purchasing power of the majority of the people, especially because we still depend on imports for many basic necessities such as wheat flour, beef and food crops. A number of factories have laid off workers, wrenching and hurting tens of thousands.
But judging from past experiences and barring political turbulence, a financial market distress or panic is mostly temporary as it will eventually die of exhaustion or be trampled by the heavy artillery of government reform policies.
Today, the falling rupiah is by no means a sign of a brewing crisis, but a welcome alarm for the inefficiency that we had neglected for too long during the 2010 to 2013 commodity boom era. The economic slump in China and the accompanying steep fall in commodity prices now expose our structural weaknesses.
But the more aggressive the government is in implementing the badly needed reform measures, the easier it will be to force more restructuring in the financial sector and the economy as a whole and the better the chances of leaving the surviving system stronger.
The central bank still worries about the fallout from the upcoming money tightening in the United States expected later this year. But with inflation still in single digits, Bank Indonesia does not need to further raise interest rates to punitive levels.
The challenges ahead are still uphill, but with a stronger government and the strong support of the House of Representatives we will come out a stronger nation and country in confronting those challenges as we pass the stress test.