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Mariam Abdallah- Introduction (What Happened?)  

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Mariam Abdallah- Introduction (What Happened?)  

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The Asian financial crisis of 1997–1998 reduced the rupiah's value by over 80% in only a few months. It was a major factor in the overthrow of President Suharto's government. The rupiah had traded at about 2000–3000 rupiah per 1 USD. However, it reached a low of 16,800 rupiah per dollar in June 1998. The currency's value is now destroyed after being stable in prior years. Also, the government did not take any action to devaluate or revalue the banknotes.

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The Asian Financial Crisis started on  July 2nd, 1997 when the Thai government was loaded with a huge foreign debt, causing it to float its baht. This monetary shift was aimed at stimulating export revenues but it was ineffective. It soon led to a negative effect in other Asian countries as foreign investors such as Indonesia. Other countries that were affected are South Korea, Thailand, Hong Kong, Laos, Malaysia, and the Philippines. Other countries that were less affected are China, Singapore, and Vietnam.

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More about the crisis..

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The Indonesian Rupiah is considered as a soft or weak currency which doesn't have much of a demand on it, due to the idea of not producing anything that is important to other countries or even hard as a workforce that is highly demanded among the markets which is always compared to the Chinese people.

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As everyone knows, Indonesia is a country that is not well known for its strong economy. Indonesia, even before the crisis, had a weak economy and all the world viewed it as a weak country. As a result, there isn't any demand on the Indonesian currency, which caused its value to be very low. David Samuel, economist at Bank Central Asia, said the lower demand for foreign currencies is caused due to the slowing economy. As Indonesia's economy has been in slowdown-mode since 2011 economic activity has been slowing accordingly. For example, imports into Indonesia during 2015 fell 19.9 percent (y/y), while the country's exports declined 14.6 percent (y/y). Moreover, people can recognise Indonesia as a vacation destination. However, still, this has no impact on how they view its currency. The world probably views it as a weak currency due to the weak economy they have.

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The Indonesian case compared to Egypt has a better future meanwhile it suffers right now. The Indonesian people have a better idea of relying on their own products which will make their issue a bit easier to overcome and better to be dealt with. Also as it might help that this decline in the currency might be the same as China which will make more demand on the Indonesian products if they trigger, this means that the Indonesian government will boost again

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Since 2008, in order to overcome the United States of America's economic crisis the central bank decided to print dollars in order to assure stability in the economy even if they will make the dollar a bit cheaper, but for other countries it was the best decision, they decided to help USA, and use their dollar for all their importing and exporting of goods, which made the dollar a very important currency for the Indonesian economy, with the high demand and the massive power of buyers, the price of the dollar rose and that was only the beginning.

The second reason why the Indonesian rupiah is very weak is that the Indonesian exporting products such as crude oil, crude palm oil and coal. These require a stable economy therefore they cut all the exchanges and trading with Indonesia which cause the prices of these products to be so cheap and no demand on it. With the booming of the Chinese exports to all countries Indonesian people now are suffering, the people used to purchase domestic Indonesian products but in high prices but now with the Chinese products they rely on them which means more value to the foreign currency and less value to the Indonesian Rupiah. This also triggered the current account deficit or the terms of trade in which the Indonesian economy imports more goods than they export. This is the main reason why the Rupiah became very cheap and it will remain cheap unless they rely on themselves and do their own products.

Some information about Indonesia:

- Inflation Rate: 7.26%

- External debt: $304.3b

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Trade and foreign direct investment have been at the heart of Indonesia's economic policy during the review period. In 1994-96, the trading had slowed down compared with previous years. However, the government decided to accelerate the pace of reforms and to remove restrictions on domestic and international trade. These reforms involve, inter alia, a major review of anti-competitive practices, including monopolies, oligopolies and all other restrictive marketing arrangements that had survived Indonesia's trade liberalisation in the last decade.

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Terms of Trade in Indonesia increased to 107.55 Index Points in September from 105.64 Index Points in August of 2016. Terms of Trade in Indonesia averaged 101.73 Index Points from 1998 until 2016, reaching an all time high of 117.70 Index Points in November of 2005 and a record low of 77.43 Index Points in July of 1999.

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US exports to Indonesia in 1999 totalled $2.0 billion, down significantly from $4.5 billion in 1997. The main exports were construction equipment, machinery, aviation parts, chemicals, and agricultural products. US imports from Indonesia in 1999 totalled $9.5 billion and consisted primarily of clothing, machinery and transportation equipment, petroleum, natural rubber, and footwear.

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The crisis of Indonesia's currency has had an overwhelming impact on employment, especially in urban areas. The industry which felt the most effect, was construction since an estimated one million workers have been laid off due to short-term foreign borrowing. There have also been major lay-offs in manufacturing and in the banking and service sector as new highly leveraged manufacturing concerns have gone bankrupt. The banking sector has nearly collapsed and industries providing services to new industries and consumers have lost their customers. In fact, the asian financial crisis caused Indonesia's unemployment rate to be more than 20 percent. This graph can perfectly describe how the asian crisis affected the unemployment rate. As you can see, at first, Indonesia had a very low unemployment rate. However, when in 1996, during the crisis, the unemployment rate became very high.

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Mariam-Economic Conditions (Inflation)  

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Mariam-Economic Conditions (Inflation)  

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The most significant effect of the economic crisis on the people of Indonesia has been inflation. During the first half of 1997, Indonesia was experiencing low inflation (2.6 per cent), but the price increases of the second half brought annual inflation for 1997 to 11 per cent, compared with a rate of 6.5 per cent in 1996. Prices have risen across most sectors, especially in food,which is similar to what is happening now in Egypt. Food prices increased by 30 per cent in January and February. During the last year, rice has increased from 1800 rupiah per kilo to 3500. As you can see below, this graph illustrates the inflation rate in 2012 and 2013. Even though its way after the asian crisis, but it still shows that Indonesia's inflation rate is very high and that it doubled in October 2013.

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During the authoritarian New Order regime of former President Suharto (1966-1998), the country’s financial sector was in a horrible state due to the corruption. Indonesia’s financial sector had absolutely no supervision. In fact, even the central bank had no clue about domestic and foreign money flows. This resulted in huge short-term privately-held foreign debt hence causing a bubbling economy. This foreign debt, becoming more massive due to the weakening rupiah, ended many local businesses.

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One advantage of the weak Indonesian Rupiah is that its good for Indonesia’s trade balance as exports become competitive on the international market while imports become expensive. However, Indonesian exports, depend on commodity exports and not on manufactured products and, problematically, prices of commodities have been touching six-year lows. As a result, the improving trade balance of Indonesia is primarily caused by slowing imports, rather than accelerating exports.  This also means that there is no real use for Indonesia to join a currency war.

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A weak rupiah has more negative side effects than positive ones and therefore Indonesia’s central bank is intervening in the market to support the currency. First, expensive imports cause imported inflation, while Indonesia’s inflation rate is already high at 7.26 percent in July 2015. In addition, the weak rupiah is a threat to foreign debt. At the end of 2015, Indonesia’s external debt was about USD $304.3 billion, comprising of USD $134.6 billion public sector external debt and USD $169.7 billion private sector external debt. About 25% of private sector external debt is short-term debt and due to the weak rupiah, some small and medium-sized enterprises could have serious difficulty to service their debt repayments.

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Overall, Indonesia is a country that has an extremely weak economy, and therefore a very weak currency. There is simply no demand on the rupiah sine it has no value. This is due to many factors such as economic, political, psychological, and terms of trade. The asian financial crisis is what caused all of this to occur. It did not only hurt Indonesia, but other asian countries.