DrStephen Sherlock (1998) study found the following that: “The crisis resulted from a collapse ofconfidence in the ability of a number of SoutheastAsian countries to maintain their fixed exchange rates while continuing to allow the free movement of foreign financecapital at a time of increasing current accountdeficits.” Before the Asian Financial Crisis, Indonesiaeconomic seemed to be growing because of the low inflation in the country,trade surplus, massive foreign reserves and excellent banking system. Accordingto Nasution, A. (1998),”The financial crisis occurs in Indonesia during the unfortunate time ondomestic front, the weather related problem because of El Nino which hasignited forest fire and long drought last year is likely to continue until thisyear.
” A lot of productions in agriculture sector was seriously damaged and thefood price begin to raise and their exports keep decreasing. In 1997-1998,their rice production is estimated to drop from 8 to 10 percent. In the economic sector, when most of theinvestors from the outside began to feel uncomfortable with companies withinIndonesia (the effect of the economic declined from the nearby country) whichmade them pulling their money from the country and went to another Asiacountries. The currency was set to float immediately after August 1997 due thisunexpected event, causing business with the other foreign loans have to paymore money. The rapid decrease in the rupiah, the weakness of the Indonesiamonetary sector soon was revealed. This made the Indonesia economy started togo downward. Furthermore, 80% of its value started to lost and from July 1997to January 1998, the value declined from 2,400 rupiah to one dollar to 10,000rupiah per dollar (Jeffrey Hays, 2008). Only the first week of January, itbegan to drop 10 percent of its current value every day and before Suharto’sresignation in May 1998, it reached of 14,000 rupiah to one dollar and later itrose to 16,000 per dollar.
A lot of Indonesian companies (including banks;which some were known to be very weak) rushed to purchase dollars, in the waythat putting the rupiah value in a much worse situation (Indonesia-investments,n.d.). Moreover, some of the banks suffer huge losses while other went bankrupt(around 16 major commercial banks were closed) due to the unable debts thatthey couldn’t pay, which exacerbated the rupiah. Despite to the crisis, thestock market had degraded by 49 percent at the year end of 1997 and in 1998, itshrunk the whole Indonesia economy by 15 percent and the unemployment rate roseto 13.2.