Flight from the Indonesian Rupiah – Part II

The previous post dealt with the self-fulfilling prophecy – or “self-reinforcing feedback loop” – of negative expectations which, when acted upon, create the very situation that was feared/expected in the first place. If speculators/investors feel a currency such as the Indonesian Rupiah (IDR) overvalued then their very actions of dumping the currency will create a fall in the exchange rate for the Rupiah – the IDR will depreciate.

No, thinking oneself attractive does NOT have a positive or self-reinforcing effect and most certainly doesn’t work with women. Trust me, I’ve tried.

Moving on: after lingering around IDR9,000 to the USD for most of my two year sojourn in Jakarta, it became increasingly obvious to anyone who could read the signs that there was going to be a serious re-adjustment to the USD/IDR exchange rate! Quite frankly, the writ was on the wall in ten foot letters and a cohort of American boy scouts brought over for a cookie festival would have seen the signs….and would have demanded payment in greenbacks rather than Rupiah!

So, how does your average cynical expatriate – or economist – cleverly see the subtle signs of impending downward adjustment of a currency that by weight is almost less valuable than high quality toilet paper? Here are a few random observations during the period October 2012 to June 2013 that, taken together, are positively gospel in terms of predicting that the IDR would soon plummet like a lead budgie:

1. When governments and central banks repeatedly go out with the message “All is OK…we are from the government…you can trust us…” you KNOW that something is seriously amiss. After the Bank of Indonesia spent some USD10 billion during the autumn of 2012 attempting to bolster the IDR (by purchasing IDR on the Foreign Exchange Market) most expatriates started holding on to dollars and delaying exchanging for IDR until the very last moment.
2. Most expatriates in Indonesia have salaries that are denominated in dollars and virtually everyone keeps their salaries in dollar accounts – if they bother to keep any of their salaries in Indonesia at all! (Many simply had their companies transfer USD to home accounts in Europe or the US and extracted IDR from ATMs.) Thus one can go down and extract US dollars straight from the ATM and then take the dollars to the friendly local neighbourhood money changer.[1] Or rather, “could”. The run on the IDR meant that ever more people started saving in dollars, knowing that they would keep value – or in fact increase in value in terms of the Rupiah – so the Indonesian government passed legislation banning banks from providing US dollars via ATMs.

No more dollars.

3. The above was a very cunning way of cutting down effective demand for USDs since now people had to go to banks to get their money – which would mean hours in traffic during a Saturday morning. The next step was therefore to go to the bank once per month and extract pretty much all the dollars possible – keeping a minimum requirement on deposit. The government and banks covered that loophole VERY quickly by setting a weekly limit on withdrawals from dollar accounts whereby anything exceeding the amount meant a few percentage points penalty. Well do I remember asking the teller in a most incredulous and insulting voice is he were serious; “…do you mean to tell me you are going to CHARGE ME for extracting MY OWN MONEY????” (To his credit he kept his stony face…but not my money as I immediately closed the account.)

The points above underpin what most of us expatriates did; we simply avoided holding on to the Rupiah and kept our holdings in US dollars. The Indonesians with the wherewithal dumped IDR in favour of any other currency – primarily the Singapore and US dollar.

The end result is illustrated in the Forex markets above. The increased demand for the USD (D₀ to D₁ in the diagram on the left) together with decreased supply (S₀ to S₁) caused a near 20% increase in the price of the USD. This of course means that the IDR must fall; as people tended to get rid of the Rupiah as quickly as possible to get hold of USD (or any other currency), supply of the IDR increased (S₀ to S₁ in the diagram on the right). This was compounded by a decrease in demand for the IDR as investors/speculators and households avoided holding on to the Rupiah, demand for the IDR fell (D₀ to D₁). In summa; the price of the IDR over the past year has fallen by some 17%.

Oh bother. I just discovered I have some IDR1,600,000 in my desk drawer here in Shanghai. That means I’ve already lost about 24 of the original USD163.

Trade anyone?