Euro could outshine dollar in Indonesia

By Tony Sitathan, Asia Times, 3 April 2003

JAKARTA—As a US-led war rages in Iraq, the almighty US dollar is under fire as the international currency of choice in Indonesia. Businesses, the central bank and some in government are eyeing the euro as an international transaction medium that could be less volatile in the long term and might carry less political baggage.

The euro seems to have appreciated against most baskets of currencies while the US dollar has depreciated in value, said K Gigendra, a money changer with CV Tri Tunggal in Jakarta.

The ongoing Iraq crisis has had a direct impact on the softening of the US dollar amid the strengthening of the euro. The continued dismal performance of the US corporate sector and its poor corporate earnings this quarter have also served to weaken the dollar since the onset of the Iraq war.

Adrian Low, an economist with Axiom Consulting based in Hong Kong, says there are signs of a further slowdown in the US economy. Consumer spending in the US has tapered off by almost 3 percent this quarter and we see signs of a slowing down in all fundamental sectors of the economy. There has also been a slowdown in the semiconductor industry’s sales as well as dip in the overall share prices of blue-chip companies by [about] 10-15 percent on average this quarter, he said.

The overall weakness in the US economy has created an adverse reaction to the dollar, which has long been considered the international benchmark for foreign currencies and international reserves. Low notes that the backlash against the dollar comes in the face of mounting opposition to US foreign policy and Washington’s decision to attack Iraq at a time of great economic uncertainty in the marketplace.

The US has picked a bad time for invading Iraq without the support of the world community. There is also the big question of who is going to pick [up] the war tab that could easily surpass US$1 trillion if the war continues for three to four months instead of the earlier predicted two to three weeks. The longer Saddam Hussein holds out, the more expensive it becomes, stressed Low.

The political backlash against the United States is becoming more apparent in Indonesia, where some want to look at the euro more carefully as the currency of choice. There are reports in financial circles that Indonesia’s central bank, Bank Indonesia (BI), is considering the use of the euro for Indonesia’s foreign-exchange reserves after the increasing value of the euro during the past few weeks. BI governor Syahril Sabirin has said that there are intentions to study the long-term conditions of the European economy and that a discussion paper on the viability of the euro will be shortly be released internally to the Ministry of Finance for consideration.

He said BI has been considering other currencies than the dollar for its foreign-exchange reserves for some time already. The central bank has a history of charting the progress and prospects of other baskets of currencies besides the US dollar.

With the continued strengthening of the euro against the dollar, several export-driven companies are seriously considering switching to the euro. The national oil and gas company Pertamina is one such company. Although oil is currently traded internationally using US dollars, a finance official from Pertamina stated that the euro looks appealing since its been particularly stable as compared with the dollar, which is increasingly volatile against the Indonesian rupiah. What is needed is a stable international exchange currency which is internationally recognized. The euro is the nearest alternative, said the official.

Agus Widjaja, a consultant for a state mining company based in South Kalimantan, pointed out that the US dollar has fluctuated by more than 5 percent against the rupiah in recent times. Although coal sales contracts are fixed at US dollar rates, we have found that the appreciation and the depreciation of the rupiah against the US dollar have made it difficult for the mining of coal and the contracts of work to be executed without any setbacks or delays on the fulfillment of the [sales] contract. Perhaps a more stable currency like the euro could be more advantageous for those in the export commodities, he said.

However, Indonesian Finance Minister Boediono maintained that Indonesia still requires US dollars for its international transactions, and any change from dollar to euro would be very much dependent on the future needs of Indonesia. Indonesia at the moment would seem to be very much dependent on the dollar, since most of its foreign investments, including world aid from the World Bank and the International Monetary Fund, come in the form of US dollars.

The US dollar still has considerable appeal as an international trading currency, although the euro since 2000 has been seen positively as a stable currency that has appreciated in value, said Iwan Yoniton, a securities stockbroker with Mandiri Security in Jakarta. It [remains] to be seen if the euro can grow in importance and dominate the world trading scene just as the US dollar had in the past.

Support for the euro has even come from those at the top of government. Vice President Hamzah Haz has recently supported the idea of using the euro as an alternative medium of payment in international trade and a component of foreign-exchange reserves, as long as it would be beneficial for Indonesia’s economy.

He said in Kompas, the Indonesian vernacular newspaper, that should Indonesia ever adopt the euro it must be for economic reasons and efficiency and not for political reasons. He also favored to support a study to determine the impact on local and international trade before adopting the idea to use the euro. One thing is for sure, the adoption of the euro as an alternative means of payments could be an effective solution to speculative dollar-oriented dealings, he said.