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FEWER ZEROES FOR INDONESIA

Carrello

By Carrello,
in Foreign Currencies

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Carrello

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Fewer zeroes for Indonesia

Jan 20, 2012

By Megawati Wijaya

JAKARTA - Southeast Asia

www.atimes.com Online

Draft legislation to redenominate Indonesia's currency is expected to gain momentum this year as lawmakers and monetary authorities push to drop the last three zeros from the nominal value of the rupiah. While the paper change will be largely cosmetic, analysts are divided on whether a redenomination could spark inflation and sow confusion among the public.

The rupiah currently trades at 9,200 to the US dollar and is the second-lowest priced currency in the world, trailing only the Vietnamese dong. The rupiah collapsed amid the 1997-1998 Asian financial crisis and despite economic and financial recovery still trades at a fraction of its pre-crisis value.

Finance Minister Agus Martowardojo said last month that the government was prepared to submit the draft law to the House of Representatives (DPR) for approval.

The central bank, Bank Indonesia, has backed the move for various reasons, including the need to simplify accounting standards for transactions that now often exceed trillions of rupiah to the national pride that will be supposedly restored through a lower nominal currency value.

If the bill is passed, as is expected, Bank Indonesia has said it will need one to two years to introduce the concept to the public and explain how to adapt accounting and information systems. During the proposed transition period, prices of goods would be labelled with both the old and new rupiah rates. Old notes would later be recalled and replaced by new notes where one rupiah would be equivalent to 1,000 of the old bills, according to the proposed plan.

Certain financial analysts wonder if redenomination could be used to mask a devaluation of the currency to improve export competitiveness. If so, the policy motivation isn't abundantly apparent: Indonesian gross domestic product (GDP) grew by 6.5% last year, up from 6.1% in 2010. That represented the fastest growth clip seen since 1996, the year before the Asian financial crisis hit and bankrupted the national coffers. GDP growth is projected to hit 6.3% this year.

In December, Fitch Ratings was the first of the three major credit agencies to raise Indonesia's sovereign rating from junk status to BBB minus, based on the country's steady economic growth, low debt and strong macroeconomic position. The upgrade represented the first time Indonesia has achieved investment grade status since the economy collapsed during the 1997-98 financial crisis.

Moody's followed suit this week, raising Indonesia's rating from debt to investment grade. The credit rating agency said Indonesia's cyclical resilience to large external shocks pointed to sustainably high trend growth over the medium term.

"A more favorable assessment of Indonesia's economic strength is underpinned by gains in investment spending, improved prospects for infrastructure development following key policy reforms, and a well-managed financial system," Moody's said in a public statement.

Fundamental strengths

The rupiah was relatively stable against the US dollar during last year, a troubling economic and financial period around the world, with the local unit trading between 8,500-9,000 to the greenback.

That stability would seem to indicate that the proposed redenomination plan is not being driven by urgent economic problems, as has been the case in the past. Inflation was a manageable 3.79% in December, marking a 20-month low, although there are indications that exports are slowing amid economic turbulence in Europe and the United States and slowing growth in China.

Bank Indonesia deputy governor Budi Rochadi has acknowledged that a redenomination of the rupiah would be "disastrous" if the transition was attempted during a period of high inflation. He has said that three requirements must be met to redenominate successfully, namely a stable economic environment, low inflation and a government guarantee of price stability. He has said that all three conditions are currently and securely in place.

Mika Martumpal, a currency analyst at Commonwealth Bank based in Jakarta, believes that the redenomination plan carries few economic risks.

"It's not an overnight change. Bank Indonesia has planned to have a transition period that may run for years in which both currencies - existing rupiah and new rupiah - are accepted as legal tender. Consequently, the public will have time to accept the new currency," he said.

Martumpal notes that Turkey dropped five zeroes from the lira and had two currencies in circulation for four years before dropping the word "new" from the replacement currency in 2009. Turkey has often been cited as a success in using redenomination to fight inflation and simplify economic transactions that were previously denominated in terms of billions, trillions and even quadrillions, Martumpal notes.

The key to avoiding a sudden currency devaluation during redenomination is public education, according to Johannes Ginting, a market analyst at Monex Investindo Futures. "Preparing the public to accept the new rupiah will take time. During the transition period, prices of goods have to be clearly marked with two currencies to ensure that psychologically people will understand that the value of their money has not dropped," he said.

Traumatic past

Managing those perceptions, however, may be easier said than done. An older generation of Indonesians remembers having the value of their savings drastically reduced through currency redenomination schemes implemented in 1950, 1956 and 1966. The first, in 1950, saw then finance minister Syarifuddin Prawiranegara order the public to literally tear in half all of the notes they held denominated over five rupiah.

The left portion of a torn bill was valid as legal tender but worth only half the pre-torn bill's original amount. The right portion of the torn unit was no longer valid but could be exchanged for government bonds - valued far less than the money's original face value.

The policy aimed to reduce public purchasing power, counter hyperinflation and pay off then-spiraling national debt. While the policy's success in dampening inflation was temporary, the move managed to drastically reduce the quantity of money in circulation and replaced the bills issued by the colonial Dutch administration.

In 1959, Indonesia again sought to reduce the amount of money in circulation and contain hyperinflation. A presidential decree acted to drop one zero off all 500 and 1,000 rupiah notes, an unexpected move announced on the radio that effectively reduced the value of the currency by 90% overnight. Those ham-fisted interventions collapsed the value of the rupiah, which fell from 45 to the US dollar in 1955 to 35,000 by 1965.

An even more radical change took place in 1965 to curb inflation that then ran as high as 650% Then president and independence hero Sukarno, whose central bank over-printed bank notes to finance political prestige projects, ordered the public to exchange their old 1,000 rupiah notes for new one rupiah notes. The move drove prices even higher as Indonesians ditched cash for gold, goods and other assets.

Indonesia is now in better technocratic hands, but policymakers still feel obliged to play down that economic history. The proposed redenomination plan, Bank Indonesia officials have emphasized, is wholly different from the schemes of the past. Central bank governor Darmin Nasution has repeatedly said that the purchasing power of the rupiah will remain the same, despite dropping three zeroes from its nominal value.

Still some local analysts and business leaders suspect a hidden agenda and have referred to lingering "trauma" among older Indonesians when discussing the potential downsides of the redenomination plan.

"This has been done back in the president Sukarno era," said Sofyan Wanandi, general chairman of the Indonesian Business Association (Apindo), in a recent interview. "However it was not fruitful. Instead society endured trauma."

Megawati Wijaya is a Singapore-based journalist. She may be contacted at megawati.wijaya@gmail.com.

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Stryker365 Newbie

Stryker365

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Posted (edited)

Isn't this the second article today on redenomation from another country?

Syria to Start Managed Float of Currency Next Week, Central Bank Head Says

Read more:

and.....

Libya's bank withdraws old currency

http://www.kurdsat.tv/news.php?id=232&type=world

This is the third one including this one, this is starting to sound like there are many countries realigning their currencies..

All great news IMO

Edited by Stryker365
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GotSix Newbie

GotSix

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Posted

It's simple :rolleyes: ....this is not like the NFL....where it's a copy cat league ....Iraqi has the resources & unliminted potential as to not make the same mistakes as a third world country like Indonesia....Turkey ....& others....that have RD'ed....the CBI should learn from those mistakes & not hinder their get out of jail card :D

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Abarvets Newbie

Abarvets

Posted
Posted

Syria to Start Managed Float of Currency Next Week, Central Bank Head Says

Read more:

and.....

Libya's bank withdraws old currency

http://www.kurdsat.tv/news.php?id=232&type=world

This is the third one including this one, this is starting to sound like there are many countries realigning their currencies..

All great news IMO

There is a trend here. Now where is our VND article?

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Carrello Rising Star

Carrello

Posted
  • Author
Posted

Syria to Start Managed Float of Currency Next Week, Central Bank Head Says

Read more:

and.....

Libya's bank withdraws old currency

http://www.kurdsat.tv/news.php?id=232&type=world

This is the third one including this one, this is starting to sound like there are many countries realigning their currencies..

All great news IMO

You are now the designated driver. Good job, as usual.

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keepmwlknfny Newbie

keepmwlknfny

Posted
Posted

"The policy aimed to reduce public purchasing power, counter hyperinflation and pay off then-spiraling national debt. While the policy's success in dampening inflation was temporary, the move managed to drastically reduce the quantity of money in circulation and replaced the bills issued by the colonial Dutch administration."

Interesting.....

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