Commentary by William Pesek
Feb. 25 (Bloomberg) -- Eight long years of “you are either with us or against us” ended in a Jakarta slum.
It was an apt place to turn the page on a dark chapter of U.S. foreign policy. Secretary of State Hillary Clinton marked it last week by visiting Indonesians most at risk as a crisis that began in the U.S. spans the globe.
The chants of “Hillary! Hillary!” greeting arguably the most powerful woman in the world were sign enough that the bellicosity of the Bush years is over. Southeast Asia is anxious for better relations with the U.S., and vice versa.
Yet the most important moment of Clinton’s Asia tour received scant attention. It wasn’t Clinton talking about the Rolling Stones on a Jakarta talk show. Nor was it urging China to continue buying U.S. debt, calling on North Korean leader Kim Jong Il to chill out, or visiting Japan’s royal family in Tokyo. It involved the rather arcane issue of swap lines.
Indonesia proposed a currency-swap accord with the U.S. to help bolster the rupiah, the second-worst performer in Asia outside Japan. It would be akin to those the Federal Reserve has with Brazil, Mexico, Singapore and South Korea. It’s the right thing to do and Clinton should expedite her pledge to take the request to U.S. President Barack Obama.
Impressive Stability
Much has been said about Indonesia’s impressive stability. Even as the U.S. and Japan slide into deepening recessions, Indonesia’s $433 billion economy is expected to grow about 4 percent this year. Clinton was right to praise Indonesia as a model of how “Islam, democracy and modernity not only can coexist, but thrive together.”
Few nations are as geopolitically important. Indonesia is home to the world’s largest Muslim community and the fourth- largest population, spread out on the largest archipelagic state. Imagine overseeing 17,000 islands. Indonesia also is resource rich. The place even has oil.
Indonesia has found success in the bond market, too. On Feb. 23, the government sold triple the amount it targeted in its first sale of Islamic bonds to local individual investors this year. It raised 5.56 trillion rupiah ($466 million). Not bad considering the state of international credit markets.
Even so, with per-capita income of $2,271, persistent poverty and rampant corruption squandering output, 2009 won’t be kind to Indonesia. It may be in better shape than, say, politically unstable Thailand, yet global turmoil is closing in.
Just an ‘Appetizer’
Marc Faber, Hong Kong-based publisher of the Gloom, Boom & Doom Report, makes a good point when he says we have seen only the “appetizer” of a global slump. The worst is yet to come.
Finance ministers from Japan, China, Korea and 10 Southeast Asian nations agreed this week to form a $120 billion pool of foreign-exchange reserves that can be used to fend off speculators. It’s a good move for a region that has been unimpressive on the cooperation front during this crisis.
Not that it’s a cure-all. Investment strategist Simon Grose-Hodge of LGT Group in Singapore says the fund will “only act to control speed rather than direction and try to keep intra-Asia cross-rates roughly in line” amid increased market turmoil.
The trouble is, the money leaving economies such as Indonesia isn’t speculative in nature. It’s not hedge funds or banks with highly leveraged proprietary trading desks, but pension funds, insurance companies and mutual funds. They aren’t selling in panic, but analyzing market risks globally. Many are wondering anew about Indonesia.
Debt Load
The nation’s currency reserves slid to $50.9 billion at the end of January, from $60.6 billion in July, as the central bank intervened to slow the rupiah’s decline. A low credit rating complicates things. Moody’s Investors Service rates it Ba3, three levels below investment grade. This also is an election year, an added challenge for Indonesia in wooing foreign capital.
The swap arrangements announced by the Fed in October bestowed a “Good Housekeeping” seal on economies that are following responsible policies yet feeling the brunt of the credit crisis. Indonesia will fit that category more and more as 2009 unfolds. It would be a mistake for the U.S. not to reach out.
The risk is that Indonesia will struggle to raise dollars if things darken. Yet not standing by Indonesia “risks diminishing U.S. influence with an ally and the most populated Muslim country and exacerbating the country’s challenges with the risk of unintended consequences,” Marc Chandler, global head of currency strategy at Brown Brothers in New York, wrote in a note yesterday.
Asians are livid that their post-1997 recovery has been sidetracked by irresponsible U.S. policies and clumsy crisis management in Washington. While Asians should have done more to reduce their reliance on exports, governments were broadsided by the U.S. economy’s crash. If things worsen, $120 billion isn’t going to do it.
Clinton saw firsthand how the U.S.’s woes are hurting Asia. The U.S. should put money where its public-relations intentions are. Indonesia is as good a place to start as any.
(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net
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