The Crisis Hits Indonesia

The Indonesian rupiah was initially not affected by the pressure on other regional currencies in early 1997 because it did not appear to suffer such acute problems of a large current account deficit and high dollar-denominated foreign debt. For several years the Indonesian central bank (Bank Indonesia) had also allowed the rupiah to float within a range of 8 per cent, allowing a 4-5 per cent annual depreciation from 1995. When the Thai, Malaysian and Filipino currencies began to weaken in early July 1997, Bank Indonesia took the pre-emptive measure of increasing the band within which the rupiah could float from 8 per cent to 12 per cent. By the beginning of August, however, the rupiah appeared to have caught the 'contagion' and was falling below the 12 per cent band. Bank Indonesia was forced to allow the currency to float freely and by the end of October it had fallen from the June 1997 rate of around 2400 to the dollar to a new low of 3600 to the dollar.(5)

The rapid fall in the rupiah, beginning in July-August 1997, soon revealed the underlying weakness of the Indonesian financial sector. Panic selling of rupiah for dollars by Indonesian companies with dollar-denominated debt showed that private foreign debt was far higher than previously thought. Worse still, the fact that Bank Indonesia was unaware of the extent of the debt showed its poor capacity to oversee and regulate Indonesia's financial markets. As in Thailand, much of the foreign debt was short-term and due for repayment within twelve months and, with the continuing fall in the rupiah, was increasingly difficult to service.

The impact on many banks was rapid and calamitous. The Government liquidated 16 private domestic banks in November. The lack of confidence in the banking sector was dramatically demonstrated later that month when rumours of the death of the major shareholder of Indonesia's largest private bank, Bank Central Asia, almost sparked off a run on the Bank.(6) Meanwhile the rupiah continued to fall far beyond all predictions. By the beginning of January 1998 the Indonesian currency had tumbled to 10 000 to the dollar, a 75 per cent devaluation since mid-1997. By the end of January the rupiah fell to its low-point of 17 000 to the dollar and has traded in the 9 000 to 10 000 range since that time. This was also accompanied by a deep slump in the stock market, with the index falling from 720 in July to 600 in August and falling a total of 75 per cent by mid-December.(7)

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1.        When was the rapid decline in rupiah?

                Answer : in July-August 1997

2.       What the economic crisis for the company?

Answer : result in substantial costs to be incurred by the company so many companies out of  business and the number of unemployed

3.       Why the crisis?

Answer; when the value of the Indonesian currency depreciated against foreign currencies (mainly U.S. dollars). The decrease in the value of the rupiah against the U.S. dollar resulted in a great many large companies borrow funds from abroad

4.       Who is Indonesia's leaders in a crisis?

Answer: Suharto

5.       Where the currency weakened in early July 1997?

Answer: Thailand, Malaysia and the Philippines

6.       How bank indonesia took steps?

Answer: Bank Indonesia took pre-emptive measures to improve bank where dollars can drift from 8 percent to 12 percent

Comment

One of the weaknesses of the current crisis Indonesia 1997/1998 is the lack of transparency of financial management. At that time, no one knows how the amount of government and private debt.

When the debt is not known, of course, is dangerous for the economy. Because when the debt matures at the same time, it is possible to disrupt the availability of dollars in the country. So that led to the weakening of the rupiah.