The current financial crisis has given rise to two trends tending to strengthen the once weak US dollar almost across the board, they being risk-say American investors seek the safety of home shores and repatriate millions of dollars
foreign banks, especially Chinese, invest in ’safe’ US Treasury bills
This exacerbates problems around the world, as lending capital is sucked into America and becomes even more scarce elsewhere.
Says Eswar Prasad, a former official at the International Monetary Fund and a senior fellow at the Brookings Institution:
This is the third wave of the financial crisis. Low-income countries are getting hit very hard. The flow of private capital to the emerging market has dried up.
In the late 1990’s economic crisis in Asia as currencies fell in countries such as Indonesia demand for their (now very cheap) exports in developed countries remained strong, providing an export driven lifeline and path to recovery for the nation, as well as for Thailand.
However this time weak currencies are in tandem with falling demand for exports, putting developing countries in a very vulnerable position. In January 2009 year on year Indonesian exports fell over $5 billion in value from $12.5 billion to $7.1 billion (although imports also fell massively).
Eastern Europe is worst affected with a number of countries there thought to be on the brink of defaulting on their debt, while Eswar Prasad includes Indonesia in his list of next most at risk countries, from, again, these three factors:
constricted credit and capital supply
weak currency
weak demand for export goods
the others being Vietnam, the Philippines, Malaysia, Pakistan and Ecuador.
Any debt default in Indonesia, or at least the prospect of one in people’s minds, would cause chaos in rupiah exchange rates. [1]
Meanwhile Mirza Adityaswara, Chief Economist Bank Mandiri Group, applauds Bank Indonesia’s policy of restricting dollar purchases of over $100,000, without an underlying transaction, as a way of defending the rupiah, which in recent days has come back from its lows of around 12,000 to the dollar.
He also suggests Indonesia needs to learn from Malaysia and Thailand, and wonders whether the much smaller fall in their currencies is due to their stronger system of foreign exchange controls, or the underlying strength of their tourism industries and their openness to foreign investment.
He also suggests these two countries are better at ensuring that the proceeds of US$ denominated export sales are actually banked in-country, whereas in Indonesia there is likely to be a big shortfall if comparing port shipment dollar value records and amounts deposited in local banks.
