Indonesia Braces for Worst As Its Currency Collapses
By Paul Blustein
Prices for basic staples such as cooking oil have skyrocketed, scores of construction projects have been halted and the banking system is on the verge of collapse.
Companies are so strapped for cash that, with a week-long Muslim holiday approaching, the widespread assumption among top business executives is that many firms will not reopen.
"They're trying to do it very quietly so even their employees won't know yet. A lot of companies just won't open after Idul Fitri," a Jakarta-based banker said, referring to the celebration at the end of the month-long Ramadan fast. "You get your employees out of town for a few days -- and then you just don't open again."
For anyone wondering what it means for an economy to "melt down" or "implode," it is starting to happen here, in the world's fourth-most populous country that only half a year ago ago was one of Asia's proudest tiger economies.
Because of the dramatic plunge in the value of the rupiah, enterprising traders are using foreign currency to buy up cigarettes and cosmetics by the carton and caseload for resale in other countries at two or three times the price.
Auto dealers constantly change the prices of cars they sell because of huge daily fluctuations in the rupiah -- and some now are insisting on waiting to fix a car's price when it actually is delivered.
Ordinary citizens line up for hours to yank their money out of local banks for deposit in foreign institutions.
Once-thriving manufacturing companies now face the reality that the imported wheat that goes into their noodles or the imported fabric used to make clothing has tripled or even quadrupled in price.
Those companies unable to come up with the cash are being forced to halt production; those that survive will have little choice but to raise their prices.
The authorities "informally" have admonished companies not to raise prices much until after the Idul Fitri celebration, according to an official at a major Indonesian consumer products firm, because of worries that sharp price increases would spark social unrest.
Riots already have erupted in several East Java towns because of anger over rising food prices.
In a sign of the nervousness that pervades the country, detachments of police and military personnel were moving throughout Jakarta today as the annual holiday exodus of Indonesians visiting hometowns got underway in earnest.
For some major Indonesian industries, the sliding rupiah doesn't pose much of a problem, with oil and mining being prominent examples because they sell their products on the world market for dollars and have no trouble obtaining loans.
And for companies that export heavily and don't have to import many raw materials, the drop in the rupiah has been something of a boon because it makes their products cheaper on global markets.
"This is one great silver lining for us," said Joydeet Mazundar, an official at Texmaco, a textile manufacturer.
But after the Idul Fitri celebration ends, the unsavory prospect of a surge in both inflation and unemployment conjures some scary scenarios in a country that has been periodically wracked by violence, most notably the massacres of 1965-66 in which hundreds of thousands were killed, many of them members of the ethnic Chinese minority.
Foreign companies operating here have circulated detailed instructions for what to do should rioting erupt in the city. A number of husbands have sent their wives and children to nearby havens such as Singapore for a while.
"Almost all foreign companies I know have made plans," said a Canadian business executive. "You keep $1,000 in U.S. dollars per family member, so you can bribe your way out of the airport if necessary. You keep open return tickets out of Jakarta. You keep provisions of one to two weeks for your house, and you keep a bag packed."
Schlumberger Ltd., an oil-services company, has even established "safe houses" around the city equipped with generators for its foreign employees, according to another expatriate.
Some old Indonesia hands scoff at the worry of a possible repeat of the mid-1960s mayhem, which became the subject of a popular movie.
"You can't take this 'Year of Living Dangerously' scenario of 1965 and leverage it into this environment," said John Meeks, a longtime Jakarta resident and official at a major maker of Indonesian clove-scented cigarettes called PT Sampoerna. Most of the violence in the 1965 episode, he said, was driven by fervent anti-communism.
Still, like many expatriates here, Meeks has found the descent of the rupiah to be a peculiar mixture of the exhilarating and the horrifying.
"We've been keeping what I call the Domino's Pizza index at my house," he said. (Yes, there are Domino's outlets in Jakarta.)
"In March, a Domino's pizza was $4.30, delivered. When I was back home in the States at Christmas, I couldn't get a pizza for less than $9. You want to know what that pizza is today? Double cheese, with pepperoni, medium? It's 90 cents -- delivered."
Other expatriates gleefully relate similar stories about the power of the almighty dollar. One banker tells of two Indonesian business friends who bought sets of top-of-the-line golf clubs in Jakarta recently for the equivalent of about $1,000 a set and sold them for more than twice that amount while on business trips in Hong Kong and Singapore.
But Meeks also cites evidence that the weakness in the rupiah has reached such extreme levels that it is creating major economic distortions.
Jakarta residents are buying caseloads of Marlboro cigarettes at the equivalent of 20 cents a pack and shipping them for resale into neighboring countries such as China, he said, where they go for three times the price.
"Milo, Ovaltine, Camay soap, shaving cream -- anything that crosses borders and has international brand awareness -- people are taking it out by the container," said Meeks, who keeps close tabs on such matters from his perch at Sampoerna.
The rupiah's volatility also has badly disrupted the business of selling autos, many of which are assembled in Indonesia but that still have high import content that makes their cost highly sensitive to changes in the value of the rupiah.
"We've changed the price on the cars we sell as much as two times a week," said Irwan Barlian, head of sales at a Jakarta Mazda dealership, who said the business is selling only about 30 cars a month, compared with about 80 in normal times.
Meanwhile, the long line of Indonesians waiting today at one of Citibank's Jakarta branches bespoke an even more serious problem engendered by the tumbling rupiah -- an incipient bank panic.
Banking industry sources confirm that a "flight to quality" is underway in which depositors are withdrawing their money from Indonesia's battered commercial banks and opening accounts at foreign banks.
"My friends say it's safer at Citibank," said James Tondobala, a restaurant owner, who was opening an account there today.
Evidence is mounting that the economy is on the verge of seizing up. As the Jakarta Post put it today in an unusually blunt editorial: "The economy is not only slowing down, it is now grinding to a halt.
Pressure is on the Suharto government and the International Monetary Fund to produce some emergency measures in a hurry.
Under consideration, sources said, is some sort of restructuring of the country's banking system that would consolidate deposits in as few as 20 banks that would be covered by a new government deposit insurance.
Also under discussion is some form of formal debt moratorium for Indonesian corporations that, because of the rupiah's decline, have stopped paying on their debts to foreign lenders.
Several countries, including Japan and Singapore, have volunteered to help the Indonesian Central Bank prop up the rupiah on foreign currency markets by selling some of their dollar reserves, sources said.
However skillfully these measures are designed, the authorities still will face a daunting task in overcoming worries about Indonesia's political stability that are helping to keep the rupiah depressed.
At one of Jakarta's main bus stations today, there were thinner crowds than usual of people headed to their hometowns for the holiday.
A 40-year-old woman named Sukati speculated that with hard times ahead, many Indonesians had decided they simply couldn't afford the trip.
"I don't know about reform programs or the value of the dollar," she said as her three children stood nearby. "What's clear to me is that Indonesia needs help."
Staff writer Steven Pearlstein contributed to this report from Washington.
© Copyright 1998 The Washington Post Company