Recent Rupiah losses against the US Dollar have been a worry for many, not least the Indonesian government itself. The currency has lost some 10% against the Dollar this year and the government is doing all it can to stabilise it.

Twenty years on – have any lessons been learnt?

Those who were here 20 years ago will well remember the chaos that hit the country in 1997 and 1998 as the Rupiah lost 80% of its value, the economy came to a standstill and civil disorder, mainly in Jakarta with widespread rioting, led to the downfall of President Suharto. At that time many expats in Jakarta fled to the relative safety of Bali if they had not already escaped to Singapore.

I chose to remain in Jakarta. On the third day of rioting I received a call from a British embassy warden (which we had in those days) urging me to get to the embassy by 5.00pm as a military-escorted bus was leaving for the airport where a special British Airways flight was waiting to whisk us to safety. I explained I had just put the kettle on and was about to make some tea so told him they could go without me. Which was just as well because there was chaos at the airport that night and the flight did not get away till 3.00am. Furthermore, Suharto stepped down the next day and calm returned to the country.

Although currency issues didn’t come to a head until 1997 economic disaster was waiting in the sidelines. The fundamental problem was that companies were borrowing like mad in USD whilst their income was in Rupiah. No problem when the Rupiah stayed close to the USD, but when the currency collapsed companies could not repay their debts in USD and many went to the wall. Thousands of expats lost their jobs and left the country. With a bankrupt economy and collapsed banks the country was effectively saved by a USD43 billion bailout package from the International Monetary Fund. Ironically the IMF will be back in Indonesia from 12-14 October together with the World Bank Group to hold their Annual Meetings in Nusa Dua. Get ready for an invasion of some 12,000 to 15,000 delegates and followers!

The actual trigger for the Rupiah crash was the decision by the Thai government to devalue the Baht to encourage exports in face of a huge government debt burden. But it backfired; confidence in the Asian tigers collapsed and Indonesia fared the worst.

Little wonder there were fears recently when political and economic forces led to massive devaluations in several countries, including Brazil, Argentina and Turkey. The Rupiah fell briefly in September to 15,000 to the USD, not far from the 16,000 that it fell to in June 1998. But it has recovered from its low, although with large daily moves possible it’s impossible to predict where it will be on the day this article is published. Chances are however it               will stabilise thanks to a number of steps taken by the government. Removal of the oil subsidy would undoubtedly give the Rupiah a big boost but such action is highly charged politically and is unlikely until after next year’s presidential election.


But why is the US Dollar so strong?

While emerging market countries have problems that have contributed to the weakness of their currencies there are many factors outside their control, one of the most obvious being the strength of the USD and its ability to effectively hold other currencies to ransom. Why is this? Much of it relates to history and the way the Dollar has become the dominating world currency. Whilst the US accounts for only 20% of the world’s economic output more than half of the world’s currency reserves and trade are in USD. This state of affairs goes back to the 1944 Bretton Woods agreement which replaced the gold standard with the USD as the   global currency. The US now exerts unprecedented control over global economic activity. Many hoped that the Euro would become a strong currency to compete with the Dollar but that now looks like a pipe-dream. Needless to say, many of the world’s powers are unhappy with the situation and we are likely to see China’s currency emerging as a strong contender for the crown as its economy overtakes that of the US but it is not going to happen overnight.

An immediate threat to emerging currencies, including the Rupiah, is the likelihood this year of at least one more increase in US interest rates, followed probably by more next year. Although this threatens to cause further chaos the US is not doing so out of malice; unemployment in the US is at a historical low, wages are rising and the economy is booming. With money cheap to borrow there is a risk of a repeat of what former Federal Reserve Chairman Alan Greenspan famously called ‘irrational exuberance’ leading to another bubble and subsequent recession. Hence the need to tighten policy and make saving more attractive than borrowing. Unfortunately the rest of the world cannot follow suit by increasing interest rates as other economies are not so strong and such increases would harm growth.

If the USD begins to offer a meaningful rate of return, even as little as 2% to 3% per annum that is better than being in a currency that offers 5% per annum but which can fall by 10% in value against the USD, turning a 5% gain on paper to a 5% loss in real value. This is why investors are pulling their money out of emerging markets.


But there is a silver lining

Before you rush off to find all your spare Rupiah notes and convert them into Dollars it is worth remembering that the Rupiah rapidly recovered from its June 1998 depths of 16,000 to the USD to 8,000 and remained stable for a fair time. So any contrarian who went against the crowd and sold USD for Rupiah actually made a 100% profit if he got the timing right. Speculation indeed but sometimes it doesn’t pay to follow the herd.

For those in the tourist industry in Bali the low Rupiah offers a golden opportunity to attract foreign visitors who will now have more money in their pockets to spend. For exporters the low   Rupiah will make their products more competitive internationally.

For expat investors it still makes sense to build up your savings in your home country currency or in USD if you don’t plan to return home as it is likely to remain the dominant currency for years to come. For entrepreneurs there are plenty of opportunities to invest locally in Rupiah but be wary of borrowing in Dollars to do so. If you employ local staff make sure you adjust their wages before inflation hits them badly should there be a further fall in the Rupiah as these are the ones who would be the hardest hit with another fall.

And don’t give up on investing in emerging markets. Here after all is where we can expect the greatest future economic growth thanks to their young and growing populations. Once they get through the immediate challenges we can expect to see these markets surging once again. The US is where most money is being made for now, but that could change when the party is over and the hangover begins.


Colin Bloodworth, Chartered Member of the Chartered Institute for Securities and Investment (UK), has spent over 20 years in Indonesia. He is based in Jakarta but visits Bali regularly. If you have any questions on this article or related topics you can contact him at or +62 21 2598 5087.


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Copyright © 2018 Colin Bloodworth