Impairment of Rupiah = Crisis of 1998? Maybe Not

Indonesia experienced a severe economic crisis in 1998, which was preceded by the fall of Rupiah against US Dollar since August in the previous year (1997). And currently, as the Rupiah continues to dropped from Rp9,000’s to now Rp14,000’s per USD, some people may ask: Will we see the crisis like in 1998 once again?

The crisis of 1998 in Southeast Asia plus South Korea was preceded by a sharp decline in the value of the Thai currency, Baht, in May 1997. The decline forced the Thai government to float the Baht, or in other words, let the market to freely decide the exchange rate of Baht towards US Dollar, in July 1997. Shortly thereafter, Baht slashed until THB 56 per USD in early 1998, or fell by more than half (prior to May 1997, Baht exchange rate was stable in the range of THB 25 - 26 per USD).

Following the fall of Baht, the Rupiah also came under attack until Indonesian central bank, the Bank Indonesia (BI), was forced to widen the trading band of the currency, from previously 8% to 12% (so that the exchange rate of Rupiah towards US Dollar, after previously could only go up or down by maximum 8% in one trading day, now it can go up or down by maximum 12% in one day), in July 1997. And Rupiah immediately dropped 12% almost every day. In August 1997, BI eventually let the Rupiah to move freely according to market mechanism. As result, the exchange rate touched Rp11,000 per USD in January 1998, or fell more than 75%.

And the crisis was actually started in the beginning of 1998. In the financial statements for the full year of 1997, the public companies in the Indonesia Stock Exchange which has large debt denominated in USD reported extreme losses, because the value of their debts soar to two or three times (or even more), and many of them are threatened to default. Entering 1998, the companies tried to buy the USD in large amount in order to pay their debts, and this led to further impairment of the Rupiah, which came to an unbelievable level of Rp17,000 per USD in mid 1998. At this point, dozens of companies, both public and private, went bankrupt, and their bankruptcy dragged the banks that gave them loans. One of the largest banks in Indonesia, Bank Central Asia (BBCA), experienced a rush, President Suharto stepped down in May, and Indonesia's economic growth was minus 13.5% for the entire 1998.

Causes of crisis

In contrast to other countries which were able to recover quickly (Singapore only had a crisis for less than 1 year, or even there was no crisis at all), Indonesia took about five years to recover from the crisis, where the economy only began to grow in 2003 - 2004. Including the Jakarta Composite Index (JCI), which recorded its low in September 1997, was unable to break a new high until the end of 2003. The decline in the exchange rate of Rupiah was also the most severe compared to other currencies in the countries which also affected by the crisis. The question, why?

Rate vs USD	Before Crisis	Lowest Position	Change (%)
Rupiah	2,600	17,000	(84.7)
Baht	25	56	(55.4)
Ringgit	2.5	4.7	(46.8)
Filipina Peso	26	53	(50.9)
Korean Won	800	1700	(52.9)

And the answer is because, before the crisis, the Government of Indonesia and also its private sectors were in a very, very huge debt. In 1997, Indonesia's debt ratio to GDP was more than 150%. The country experienced a booming and prosperous economy since the end of 80’s to the mid of 90’s, and the greedy conglomerates had taken advantage of the momentum by taking the foreign debt as much as possible, and unfortunately the Government let it happened.

So the cause of the poor performance of listed companies in the end of 1997, it was initially due to the impairment of Rupiah. But after dozens of big companies suddenly required USD in large amount to pay their debts, they kept buying USD in the market, and that's what caused the Rupiah to dropped further (so the companies still fail to pay their debt, and went bankrupt), and eventually led to the crisis.

And what about this year of 2015?

In contrast to 1998, in 2015, Indonesia is no longer have a huge debt. Based on data from the Ministry of Finance, to the second quarter 2015, the ratio of government debt to GDP was 25% (including debt from private sectors, it might be 27 – 29%). Here are the data of Debt to GDP ratio from 2008 to 2013:

Debt to GDP (%)	Total	Government Debt Only
2008	33.2	32.3
2009	30.3	28.6
2010	27.4	26.5
2011	26.6	24.5
2012	27.3	23.1
2013	28.7	23.0

The point is, okay, Rupiah continues to drop, and it could reach any levels. But as long as the Government or the private sectors do not have large foreign debt, then trust me, our economy will be fine! When Indonesia got hit by the global crisis in 2008, Rupiah also fell from 9,000's to about 12,000’s per USD. But because the balance sheet of local companies had been very ‘clean’ if compared to the year of 1998, almost no companies threatened to be default and there was no rush in buying the USD, so that the Rupiah immediately recover in the next year. As you can see in the table above, in 2008, the ratio of debt to GDP of Indonesia was only 33.2%, or much lower than in 1998. Back in 1998, Asia Pulp & Paper, Indonesia’ paper giant belonged to Sinarmas Group, had foreign debt of US$ 14 billion, which of course failed to be paid after the Rupiah plummeted. But when Perusahaan Gas Negara (PGAS) issued an euro bond of US$ 1.3 billion in Singapore, it was already one of the biggest bonds in the last several years to be issued by Indonesian companies. On the other hand, PGAS itself was a large company with an asset of US$ 5.8 billion, so the bond is still reasonable. For another comparison, when Greece was in a crisis few years ago, their debt to GDP ratio was about 177%, or in other words, the Greek debt is almost two times greater than their own GDP. So how could they pay it?

The Debt to GDP Ratio of Indonesia.  Note that the trend is down steadily since 2001. Source: www.tradingeconomics.com

Only indeed, along with the further impairment of Rupiah, you have to avoid stocks of companies that have huge debt which denominated in USD, especially if the debt is not in-hedging. But well, it's not that difficult.

Original article was written in September 6, 2015.

Any inquiries about investment in Indonesia Stock Market, please send an email to teguh@averepartners.com