President B. J. Habibie’s administration is widely credited with guiding Indonesia through the 1998 financial crisis by successfully stabilizing the rupiah. Today, as the currency breaches the 17,700 mark against the U.S. dollar, observers are asking a critical question: Is the “Habibie recipe” still relevant for recovery?
During the peak of the 1998 crisis, the rupiah flirted with the 17,000 per dollar threshold before stabilizing at approximately Rp6,500. Currently, the currency faces renewed pressure. Despite aggressive interventions from Bank Indonesia (BI) and interest rate hikes, these measures have yet to yield a significant or sustained recovery.
Recent Bloomberg data shows the rupiah closing the week down 0.28% at 17,717 per dollar. While the currency briefly strengthened to 17,600 on Wednesday (May 20) following BI’s policy announcement, it surrendered those gains the following day. Throughout this year, the rupiah has weakened by 6.22%, marking a decline of more than 14% since President Prabowo’s administration took office in October 2024.
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Dwiwulan, a member of the Indonesian Economists Alliance, argues that the current depreciation is fundamentally different from the 1998 crisis. “Mr. Habibie faced the Asian Financial Crisis and focused on banking restructuring. Today, the issues are far more complex,” Wulan stated during an open discussion in Jakarta on Saturday (May 23).
In 1997-1998, currency weakness was widespread across the region, affecting the Thai baht, Philippine peso, and South Korean won. In contrast, the current depreciation of the rupiah is occurring even as many other emerging market currencies show relative strength. Wulan suggests that the pressure cannot be explained solely by global geopolitical factors; rather, it stems from domestic structural issues that have made investors hesitant to hold rupiah-denominated assets. She concluded, “The prescription for recovering the rupiah today is much more complicated than it was during Mr. Habibie’s era.”
How Habibie Stabilized the Rupiah
Didik J. Rachbini, an economist at the Institute for Development of Economics and Finance (Indef) and Rector of Paramadina University, notes that Habibie’s success was rooted in restoring public trust through institutional reform and democratization. He emphasizes that the 1998 crisis was not merely economic but also a crisis of institutional credibility.
Habibie’s administration implemented sweeping changes, including political reforms, press freedom, the release of political prisoners, and the acceleration of elections. Simultaneously, his government overhauled the financial sector by establishing the Indonesian Bank Restructuring Agency (BPPN) and consolidating several banks into Bank Mandiri. Crucially, Habibie bolstered the independence of Bank Indonesia through Law Number 23 of 1999.
“The reform of monetary and financial institutions was the core factor that allowed the short-lived Habibie administration to build a foundation for subsequent governments,” Didik noted in an official statement.
A Focus on Structural Improvement
Wulan posits that the current pressure on the rupiah reflects deep-seated structural flaws in the domestic economy, particularly within the balance of payments. Indonesia’s current account consistently runs a deficit, forcing the nation to rely on capital and financial account surpluses. As capital flows begin to weaken, this reliance becomes a liability.
A fundamental mismatch exists between domestic savings and the requirements for long-term development. “There is a mismatch between short-term liquid domestic savings and the need for 10-20 year long-term investments,” Wulan explained. Consequently, Indonesia remains dependent on foreign financing. With economic growth often propped up by seasonal factors like government spending, investors are increasingly skeptical about the sustainability of the current growth model.
Limitations of Bank Indonesia’s Policy
Wulan warns that current efforts by Bank Indonesia—including a 50 basis point hike in the benchmark rate to 5.25% and foreign exchange market intervention—have yet to address the root causes of the instability. High interest rates risk increasing the cost of capital for businesses at a time when consumer demand is already slowing, potentially hindering future economic growth.
Furthermore, excessive FX market intervention risks increasing the money supply, which could trigger inflationary pressure. According to Wulan, the primary solution lies in comprehensive domestic reform, including revisiting the institutional framework of Bank Indonesia to ensure its independence. She specifically pointed to the post-pandemic “burden sharing” policy as a concern, noting, “We can see that political interests have now entered the Board of Governors.”
Summary
The Indonesian rupiah has recently faced significant pressure, falling to over 17,700 per U.S. dollar despite intervention efforts by Bank Indonesia. While President B. J. Habibie successfully stabilized the currency during the 1998 Asian Financial Crisis through institutional reforms and democratization, experts argue that current economic challenges are fundamentally different. Today’s depreciation is attributed to internal structural issues, including persistent current account deficits and a heavy reliance on foreign financing, rather than a regional financial collapse.
Economists emphasize that the “Habibie recipe” of the past may be insufficient for current circumstances, which require deeper domestic reforms. Current policies, such as interest rate hikes and market intervention, have struggled to address the underlying mismatch between domestic savings and long-term investment needs. Furthermore, concerns regarding the independence of Bank Indonesia and political influence on monetary policy suggest that restoring investor confidence requires a comprehensive structural approach rather than simple administrative measures.
