Indonesia sharply raised benchmark interest rates yesterday and promised fresh measures to stabilize its sliding currency, a stiff policy response that highlights the growing risks to many developing economies from soaring oil prices.
While much of the world has appeared to sail through the recent bout of high energy prices, Indonesia and other parts of Asia have struggled, in part because they are spending enormous sums to subsidize consumer fuel prices. In Indonesia, the subsidies are expected to total as much as $14 billion this year, about one-quarter of all government spending.
That has put pressure on Indonesia's currency, the rupiah, and has led to a broader erosion of confidence in the economy.
In response, the central bank increased the target for key one-month interest rates by three-quarters of a percentage point, to 9.5 percent. It also required banks to hold more money at the central bank, a form of monetary tightening. Economists say the government might be reluctant to raise rates further because that could reduce consumption, the driver of the economy.
The moves appeared to halt a steep weakening of the rupiah, which at one point yesterday morning in Jakarta hit a four-year low of 11,750 to the dollar, down 9 percent from Monday's close.
The currency settled at 10,525 to the dollar.
Even so, economists said, Indonesian officials might have to do more to bolster confidence in Southeast Asia's biggest economy. They also cautioned that Indonesia's problems could be a harbinger of troubles in other Asian countries if further steps aren't taken to deal with the rising cost of oil.
The turmoil is turning out to be the toughest economic test yet for President Susilo Bambang Yudhoyono, who took office in October as Indonesia's first directly elected leader. Yudhoyono, who convened an emergency cabinet meeting yesterday, said his government would announce additional measures to support the rupiah today.
"I ask the people to remain calm. The current economic condition and situation is different from what it was in 1998," he said in a nationally televised address.
The recent fall of the rupiah does bear some of the hallmarks of Asia's 1997-1998 economic crisis, which triggered social and political chaos that ultimately led to the downfall of Suharto, Indonesia's longest-serving president.
But regional economists stress that Indonesia and its neighbors are healthier than they were eight years ago. "It's way too early to begin talking about a fiscal crisis or financial crisis in Indonesia -- and yet people are," said Michael Spencer, an economist at Deutsche Bank in Hong Kong.
Still, Indonesia's problems highlight the risks Asia's economies face if oil prices don't come down soon. Because they rely so heavily on fuel-guzzling factories for growth, Asian economies use considerably more oil and gas to generate economic activity than in the West. They also have less oil and gas of their own, which means they must import more of their oil than do the United States and other countries.
In recent weeks, economists have begun downgrading their estimates of economic growth in Asia as they confront the reality of $70-a-barrel oil.
Macquarie Bank economist William Belchere noted in a report this month that higher oil prices are pushing several countries in Asia into current-account deficits, leaving them with fewer options to absorb the costs from their rising oil imports.
The upshot, Belchere wrote, is that several Asian countries could be forced to raise interest rates to defend their currencies and prevent inflation.
Most at risk, he said, are India, the Philippines, Thailand and South Korea.
Indonesia's situation is in some ways unique, however. For one, it subsidizes consumer fuel prices far more than most other Asian countries. Retail gasoline prices in Indonesia average 24 cents a liter (about 91 cents a gallon), compared with 51 cents a liter in China and 62 cents in Thailand, according to data from UBS.
Also, Indonesia's problems are compounded by intense political pressures that make it difficult for the government to rein in the state subsidies. Previous decisions to raise fuel prices sometimes led to riots.
Economists say that based on current energy prices, the country's $7.8 billion allocation for fuel subsidies this year -- particularly gasoline and diesel -- could be used up before the end of September.
Daniel Lian, an economist for Morgan Stanley, wrote in a research report this week that the outlook for Indonesia's debt-laden economy wasn't encouraging. That is because the limited policy options of removing fuel subsidies or ratcheting up interest rates to stabilize the currency would hurt the economy. "The Indonesian government possesses no fiscal latitude to support the economy," he said.