Rupiah's slide may be timely warning

The Indonesian rupiah's woes might be a blessing in disguise for the global economy.

The 6 per cent slump in the rupiah against the US dollar in the past month is being taken seriously by other Asian nations as a preview of what may lie ahead for their own currencies.

The realisation seems to have dawned on Asian governments that they can no longer let their citizens pretend there is no such thing as expensive energy.

In the name of protecting the poor, governments in China, India, Indonesia, Malaysia, Thailand and Sri Lanka have either subsidised fuel prices from their own budgets or, what is worse, ordained that they be kept low by twisting retailers' arms.

The result: one half of the world is distorting prices for the other half and pushing the global economy towards recession.

The Indonesian Government is making petrol available to motorists at 2400 rupiah (32c) a litre. Motorists in Bangkok yesterday spent the baht equivalent of US$2.42 for a gallon of petrol and in Beijing, the Government's guidance price for standard unleaded petrol was 3.43 yuan (42USc) a litre.

Artificially low energy costs have been a key plank of the Asian strategy to keep inflation in check and avoid raising interest rates. Now that the market has called the bluff in Indonesia, there is pressure on the region's authorities to cut fuel subsidies and raise interest rates.

India raised vehicle fuel prices by 7 per cent this week, the first rise since June. Thailand's central bank raised its key interest rate by a half percentage point to 3.25 per cent, a five-year high.

In general, private consumption in Asia is not as strong as authorities would like it, with the notable exception of India.

That explains why the region's governments have been reluctant to do the right thing: pass on increases in fuel costs to final consumers and raise interest rates.

With inflation in China and India holding at low levels - 1.8 per cent and 3 per cent respectively - monetary authorities in Asia's two most dynamic economies may not see the need to increase interest rates.

Chinese inflation is low because of rampant overcapacity in the economy: companies can't raise prices even if they want to.

In India, the wholesale price index used to measure inflation says nothing about the rising costs of education, private health care and other services.

In other Asian nations, inflation is rising. Consumer prices in Thailand rose 5.6 per cent last month while t the inflation rate in Malaysia in May rose above 3 per cent for the first time in six years. Indonesia is forecasting 9 per cent average inflation for this year. It isn't too late. If Asia cuts subsidies and raises interest rates, global energy demand will ebb. The oil bubble will then have a chance to deflate. Otherwise, the US householder, the world's consumer of last resort, may shy away from stores this Thanksgiving and Christmas. That too will burst the bubble, though in a way that would be painful for all.

- BLOOMBERG