REDENOMINATION AND THE PROSPECT OF RUPIAH

It might have been a coincidence, but when the discourse of Rupiah redenomination surfaced lately, that was also the time when Rupiah value was under pressure from the position of Rp 9,400 per USD in early January 2012 to the present position of around Rp 9,700 per USD.

As known, Minister of Finance Agus Polartowerdojo had announced that the Government planned to run redenomination of Rupiah. The reason was because the value of Rupiah denomination today was rated as inefficient. Today Rupiah had too many digits which tend to he unpractical.

Such was the statement of the Ministry of Finance in his presentation on the occasion of Kick off Public Consultation on Non Devaluation Rupiah Redenomination in Jakarta (23/1). According to the Minister, there were still many inefficiency effect if Rupiah redenomination was noit exercised.

Firstly the process of data input, management of date base, date reporting and data storage tend to be inefficient. The same was with accountancy implementation and reporting and application of IT. The use of too many digits means extravagance in reporting and accountancy and use of memory in some IT varies.

Secondly, money stated in too many digits would create complexity of calculation in economic transactions which tend to cause mistakes while also time consuming. In case of non-cash payment system (ATM) and oversized digits might cause problems in transactions when the transferred amount of money exceeded the span of digits tolerable by the infrastructure of payment system (ATM) and recording system.

Thirdly, other effects would also be notably felt in education. Big denomination of Rupiah was less supportive to elementary education for children because of the daily transactions with too many digits. This was entirely different from most of the transaction examples in learning subjects in school text­books.

In tune with the Minister of Finance, the Governor of Bank Indonesia Darmin Nasution also disclosed the same thing. He showed as an example, through 2012 lest year the nominal transaction through Red Time Gross Settlement (RTGS) had reached Rp 404 trillion per day or increasing by 187% compared to 2009 which was only Rp 141.9 trillion per day. In mere three short years, the amount multiplied by threefold, so it was easy to imagine how vast the amount would be in the next five years it would need a long chain of zeros in the statement of amount.

On the other hand, in parallel with the increasing transactions in public, the number of digits used in transactions kept increasing. Therefore, in the future the need for simplification (redenomination) was pre­dictably increasing by various consideration includ­ing efficiency enhancement.

By redenomination, the chain of digits of Ru­piah would be simplified, so there would be increased efficiency in the financial sector and the real sector. Written or printed statement of transactions would be shorter and less costly.

In implementing Rupiah redenomination, the key to success was how the Government could con­vince the public that Rupiah redenomination could bring benefit to the public. As known, what was exposed by the Government was Government’s and regulator’s interest, while the domain of public interest was hardly touched. Yet obviously rede­nomination policy would be easily accepted by the public if the benefits could be felt by them.

There were two facades to benefit of Rede­nomination, i.e. tangible benefit and intangible ben­efit. The tangible benefit was the aspect related eco­nomically and generally. The intangible benefit had something to do with national pride of one's own national currency because the exchange rate value became equal or not too much dwarfed by other cur­rencies.

Assuming that the present Rp 1,000 would be equal to Rp l new Rupiah after redenomination without reducing the value, meaning by international standard 1 USD would be equal to Rp 9.6 only. Indeed something to be proud of. On the other hand the public would appreciate small denominations of Ru­piah cant for example it a supermarket cashier gave change of money in the form of 2 candies, soon the change would be in the form of Rupiah cant. There would be a new trend of cents being used in transac­tions.

How about expectations of Rupiah value in the future? One fearful thing was predictions by foreign banks that Rupiah value would sink deep to Rp 10.000 per USD this year which was in line with unstable commodity prices. The reasoning was that the issue of trade balance which was in deficit could suppress Rupiah value. Furthermore, the deficit was on account of increased commodity prices and worsening export and Rupiah by Semester l 2013 could break through Rp 10.000 per USD but hopefully could bounce beck to Rp 9.500 per USD by end of year.

Undeniably deficit of Indonesia’s trade bal­ance by and of 2012, particularly November 2012, was the highest in the world. This caused Rupiah to be helpless against foreign currencies, particularly USD. Negative sentiment from foreign investors was directly pounding on Rupiah.

Somehow the deficit in trade balance was not too big a problem for Indonesia. Because the deficit wee triggered by declining export. Moreover 65% of Indonesia's export was export commodity export of fallen prices in the world market. This was known as something cyclical soon as commodity prices got batter export would rebound and trade balance would again be in surplus and accordingly Rupiah would strengthen once more.

Moreover Bank Indonesia still had plentiful forex reserves (around USD 112.78 billion) to interfere Rupiah's declining value. Also noteworthy was the fact that BI still adopted the Export based Forex (DHE) policy which forced exporters to park their forex in national banks. A strategy ea such would increase BI’s forex reserves for sometime.

Rupiah’s fallen price was a dilemma for investors. Exporters would certainly make more profit, while importers would go broke. Through 2012, BI noted Rupiah value as being depreciated by 5.91% (y o y) to the level of Rp 9,638 per USD. But by year-to-date till end of January 201 3 Rupiah was only de­preciated by 0.2% to the level of Rp 9,600 per USD.

For the short term, the discourse of Rupiah redenomination would net as yet bring positive impact on Rupiah as there was still confusion among the people. However, after the Law on new Rupiah was put in effect and illumination campaign was launched accordingly, there would be possible positive impact on Rupiah which would take at least six years ahead after the application of Redenomination rule.

Perhaps one point which could be expected to strengthen Rupiah in time to come was the inflow of direct investment especially from abroad (PMA). With the entry of foreign investors supply of USD would be abundant which might strengthen Rupiah. In the past two years entry of direct investment would exceed target. Performance of Direct Investment relied much on Indonesia’s good economic prospect. This was evident in the fact that today Indonesia’s economy contributed 48% to economy of ASEAN states.

In terms of population, Indonesia's population had reached 72% of ASEAN population. Under such circumstances, Indonesia’s market was most promising, whether to meet local demand or for foreign market­ers to enter Indonesia. The entry of foreign capital would bring supply of USD to the local moneyrnarket where demand for USD increased occasionally and such would contribute to Rupiah stabilization.

Today Rupiah exchange rate value was reckoned to be undervalued by 4% - 5%. Somehow there was chance for Rupiah to strengthen in the near future. Rupiah weakening today was influenced by negative senti­ment and worsening or trade balance, particularly current account due to export downturn.

The debt crisis In Europe contributed to building negative perception among foreign investors about Asian currencies including Rupiah as they were regarded as risky assets. All in all some investors decided to escape to safe haven. Therefore BI was expected to remain active in safeguarding Rupiah time after time.

More importantly, the Government end the monetary authorities must be able to build and maintain investors’ trust in Rupiah through policies rated as investor friendly approach not policies which were counter­productive that chase investors away.

Business News - February 08,2013