Some fear Indonesia is heading for crisis. Growth in the second quarter dropped below 6 percent. Deficits in both the current account and trade widened markedly. The rupiah fell some 10 percent in August to its lowest level against the U.S. dollar in four years. Investor confidence has been shaken.

The estimate is that a staggering $4 billion in capital has recently flowed out of the country. If there is a crisis, the entire region should be concerned. The Association of Southeast Asian Nations (ASEAN) is building its Economic Community by 2015, and Indonesia is some 40 percent of the region’s economy.

Investors see the region as an interconnected whole, and past crisis shows how quickly and indiscriminately contagion spreads. Indonesia’s ASEAN neighbors should watch its economic woes carefully, as they too have ridden the same wave of growth in recent years.

The good news, though, is that fears about crisis in Indonesia are overstated.

Corporate balance sheets seem healthy. Flexible exchange rates can absorb shocks. Even as the rupiah drifts downward, there is no need to panic. Indonesia should not try to prop up the currency and, given its relatively low levels of foreign reserves, has no real capacity to try.

If there is extreme financial and currency volatility, the macro-economic conditions are more supportive than before. The Chiang Mai Initiative’s Multilateralization (CMIM) mechanism provides for currency swaps and others — especially Japan and China — would extend assistance to deal with the fluctuations. A crisis can be avoided. But there are no easy and quick solutions to bring back the boom.

Normally a weaker currency would help push up exports — but not in this case. Indonesia’s main exports — such as coal and palm oil — face weak demand and generally low prices as China’s growth has slowed and the resource boom has ended. For manufactured goods, Indonesia’s still-developing industrial sector cannot generate big foreign-exchange receipts.

Even as steps are taken to stem financial problems, expect higher inflation, interest rate hikes and slower growth. It will be tricky to find the right balance in raising interest rates to control inflation while avoiding further slowdowns in growth.

However, recent appointments of top policymakers offer hope. The finance minister, Chatib Basri, and Bank of Indonesia governor Agus Martowardjojo are highly-rated and credible. Since their appointments in May, policymaking has noticeably improved. Jakarta has cut fuel subsidies and raised interest rates to tackle inflation. The government’s 2014 budget aims to reduce the budget deficit.

Together, these developments indicate hope that there is enough political will and expertise to do what is necessary, however painful and difficult.

This has not always been the case. During the boom, policymakers and the legislature refused to take reform seriously. Instead, they made nationalistic and protectionist rules. Political infighting and corruption scandals also diminished attention to economic issues.

Even today, some in Jakarta seem to be in denial, pointing to external factors as the sole cause for current problems. Others are distracted with preparations for the APEC Summit in October and next year’s presidential elections. Yet reform is critical to increasing competitiveness and regaining investor confidence.

Many long-recognized issues include infrastructure gaps and energy subsidies. Others problems emerged from the boom, such as rapidly rising wages and expectations among workers.

Ironically, while Indonesia is by far ASEAN’s biggest economy, it has also been relatively closed and separate. The current situation shows a more complex reality of interdependencies. Because investors see ASEAN as a whole, Indonesia’s market jitters could affect its neighbors. Other ASEAN economies also rode the wave of loose U.S. monetary policy. With rumors of this wave ending, they could suffer too.

Efforts to solve current problems could twin with the goals of ASEAN community and economic integration. Reforms to improve infrastructure and align trade and other policies can increase ASEAN’s connectivity and synergies. This would strengthen ASEAN’s economic fundamentals, protecting the region from further panic.

If Indonesia can deal with the current problems and set an agenda for reform that integrates its economy more closely with the region, this would indeed be a lasting legacy for the Susilo Bambang Yudhoyono presidency.

Simon Tay is chairman of the Singapore Institute of International Affairs and a professor with the National University of Singapore. On Sept. 12, the SIIA concluded the 6th ASEAN and Asia Forum on the key and emerging issues in the region.

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