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From Our Correspondent: Misleading Indicators
Do the exchange rate and the stock index accurately reflect Indonesia's economy?

June 20, 2000
Web posted at 6:30 p.m. Hong Kong time, 6:30 a.m. EDT

Ever since the beginning of the Asian financial crisis, a country's currency and its publicly traded stocks have been used by journalists the same way we use shorthand to record interviews -- as quick and dirty ways to reflect complex realities. In late 1997, it was easy enough to associate a plummeting baht, rupiah or peso with the collapsing fortunes of once-darling investment destinations. When other indicators like growth rates, investment approvals and consumer confidence turned sharply south soon after markets collapsed, some of us were persuaded that currencies and stocks were the most telling indications of economic fortunes. Two years later, those habits remain -- even as the realities have become a lot more ambiguous.

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As of June 13, the rupiah has fallen by 13% since the beginning of the year. The Jakarta Composite Index has meanwhile dropped by more than 27%. Evaluated on their own, these numbers seem to indicate an economy in the doldrums. Yet economic growth in the first quarter this year topped 3%. Meanwhile, inflation is nearly nonexistent, exports have surged, and car sales jumped 28% between April and May, indicating a significant revival in consumer confidence. Cement consumption and building permits are also up -- a small boom in home construction.

What's going on? Simple. The exchange rate and stock index can sometimes reflect forces outside the country and the economy more directly than they do its internal dynamics. "These two indices are very sensitive to global adjustment as well as market sentiment," says Raden Pardede, a research officer at Jakarta's Danareksa Research. Look again: Bangkok's SET index is down over 23% since January; Manila's Composite Index 24%. The rupiah is no worse off than the New Zealand dollar, also off by 13% since January 1, and comparable to depreciation against the greenback suffered by the peso (11%) and even the euro (9%). Part of the rupiah's slide and the stock index's drift can be attributed to events that have very little to do with Indonesia: the global correction in stock markets linked to falls in U.S. technology stocks and rising U.S. interest rates, which (for the moment) make dollars and dollar deposits attractive.

The rupiah's drift and the JSX's doldrums however do echo the growing frustration and pessimism with President Abdurrahman Wahid's eight-month-old government. They indicate storm clouds ahead should Wahid fail to achieve a radical shift in his administration. But those same indicators mask a consumption-led recovery in the Indonesian economy. As consumption-led recoveries often are, it is a fragile one, dependent on the balance between consumers' optimism and pessimism. But it is a recovery nonetheless. Don't let our old shorthand habits stop you from seeing that.

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