International Journal of Economics and Financial Issues ISSN: 2146-4138 available at http: www.econjournals.com International Journal of Economics and Financial Issues, 2018, 8(1), 196-204. International Journal of Economics and Financial Issues | Vol 8 • Issue 1 • 2018 196 Early Detection of Indonesia’s Vulnerability to Currency Crisis Rosa Agustina Oyong 1 *, Rustam Didong 2 , Sugiharso Safuan 3 , Perry Warjiyo 4 1 Faculty of Economic and Business, Universitas Indonesia, Indonesia, 2 Faculty of Economic and Business, Universitas Indonesia, Indonesia, 3 Faculty of Economic and Business, Universitas Indonesia, Indonesia, 4 Faculty of Economic and Business, Universitas Indonesia, Indonesia. *Email: rosaao2000@yahoo.com ABSTRACT This study addresses an early warning system (EWS) of currency crisis, as well as proposes EWS with an approach of early detection of vulnerability to crisis. Detecting vulnerabilities is a more effective step because it gives the policymakers plenty of time before determining the right policy responses to anticipate and prevent a crisis. The data used are monthly macroeconomic data from January 2002 to December 2012. The steps taken were to identify currency crises, determine indicators of currency crises, determine vulnerability indicators to currency crises with logistic regression, and build vulnerability index to currency crises with fuzzy logic. This research builds vulnerability index to currency crisis with vulnerability level consisting of normal, alert, standby, and crisis suspected condition. This research provides EWS with the approach of early detection of vulnerability to currency crisis and builds vulnerability index that can be used in assessing and monitoring economic condition. Keywords: Currency Crisis, Early Warning System, Vulnerability JEL Classifcations: G01, C49 1. INTRODUCTION The global economy is increasingly showing uncertainty. Not even a single country in this world is immune to the threat called economic crisis. This condition causes countries to be vulnerable to crisis. Indonesia, which has experienced two times currency crisis; in 1997 and 2008, remains vulnerable to such crisis. The Asian crisis in 1997 forced Indonesian government to spend enormous budget in order to rescue banks and handle the currency crisis. In 2008, Indonesia experienced another currency crisis that caused the government to issue stimulus to boost the economy. Basically, the crisis did not occur all of a sudden, but gradually and with signals. The crisis threat can be detected through the changes in economic indicators, which then will give early warning. Therefore, an early warning system (EWS) is essential to anticipate and prevent the occurrence of crisis. EWS research on crisis has been developed since the 1990s when many regions of the world were increasingly hit by crisis, especially after the Asian one. In general, EWS research aims to anticipate and prevent crisis by predicting its emergence. Kaminsky et al. (1998) predict the possibility of a crisis within the next 24 months using a signal approach. The study looks for key indicators of the currency crisis aimed at building an EWS. Then EWS research continues to be developed in search of the best method to predict the coming crisis. Chin-Shien et al. (2008) predict exchange rate crisis events and compare several methods that have the highest predictive accuracy rate. These EWS studies that attempt to predict the crisis have a major weakness that is often low and inaccurate predictive power. This EWS model still often produces an imperfect crisis prediction because it produces false signals that predict a crisis that does not occur and cannot predict the crisis. In reality, it is very diffcult to predict the crisis appropriately. According to IMF (1998), it is impossible to predict the crisis properly. Although we have built predictive models to infuence the behavior of decision makers and fnancial market agents, the model can quickly become obsolete. It is then more important to identify the types of weaknesses that specifcally make the economy vulnerable to fnancial crises. Also, according to Ghosh et al. (2009), specifc events that trigger a crisis cannot be predicted so that with such crisis and uncertainty risk, it is still diffcult to convince the