Are today's events bad for us?<\/p>\n
Fauzi Ichsan, Gobal Markets Economist, Standard Chartered Bank,
\nJakarta, Fauzi.Ichsan@id.standardchartered.com<\/p>\n
As accounting scandals rock the United States, sending the New
\nYork stock market into a tailspin, some economic analysts are now
\npredicting \"gloom and doom\" for Indonesia. Their analysis is
\npretty straightforward.<\/p>\n
Americans love to spend on credit and they generally do not
\nmind borrowing as long as the values of their assets, their
\nhouses and company shares, are going up. Now, the analysis goes,
\ncrashing U.S. share markets will make Americans reluctant to
\nborrow and spend more because their company shares are diving in
\nvalue.<\/p>\n
A decrease in U.S. domestic spending will then restrict its
\neconomic growth. Because the U.S. economy generates around 40
\npercent of the world economy, a stagnant U.S. economy will surely
\nkeep the world economy, including Indonesia's, stagnant too.<\/p>\n
True, the fall of the U.S. share markets might make Americans
\nspend less. But U.S. company shares were highly \"overvalued\" in
\nthe first place. Even now, prices of U.S. company shares are
\nstill relatively expensive and can still fall.<\/p>\n
For example, the U.S. S&P 500 companies have a price-to-
\nearnings per share ratio (PE ratio) of around 33. This means the
\naverage share price of the largest 500 US companies is 33 times
\nits earning per share.<\/p>\n
In comparison, the PE ratio of the Hong Kong stock market is
\n16 and that of the Jakarta stock market is about 9. Furthermore,
\nif US companies revise their accounting methods to follow
\nstricter standards (such as expensing stock option compensations
\nto corporate executives), the PE ratio of S&P 500 companies may
\nindeed rise to exceed 45. Hence, the large fall of the US equity
\nmarkets may actually be seen as \"predictable market corrections\"
\nto more reasonable levels.<\/p>\n
Now, in spite of the sharp fall in U.S. share prices, American
\nhouseholds keep spending because housing prices in the U.S. have
\nnot collapsed. This is because the U.S. central bank, the Federal
\nReserves Board (the \"Fed\"), has aggressively cut interest rates,
\nmaking mortgage financing for home purchases very cheap.<\/p>\n
The result of the robust U.S. housing market is therefore not
\nsurprising: U.S. consumer demand is rising. Hence there is little
\ndoubt that the U.S. economic recovery is fragile and the
\ncorporate accounting scandals have not helped. However, there is
\nalso little doubt that the U.S. economy is likely to grow faster
\nin 2002 than in 2001.<\/p>\n
U.S. economic growth is expected to rise from 1.1 percent in
\n2001 to 2.5 percent (the U.S. government is predicting 3 percent
\nto 3.5 percent) in 2002. Consequently, the world's economic
\ngrowth is also expected to rise from 2.5 percent in 2001 to 3
\npercent this year.<\/p>\n
Hence the likelihood of the world economy growing faster
\ncannot be bad for Indonesia.<\/p>\n
As far as international relations and economic policy are
\nconcerned, the benefits of the world events for Indonesia are
\nmore apparent. Take the U.S. foreign policy on Indonesia.<\/p>\n
After Sept. 11, its foreign policy priority on Indonesia has
\nshifted from human rights to the war on terrorism. Our support
\nfor the U.S. in this war has certainly helped smoothen the
\nsupport given by the IMF and the international donor community to
\nIndonesia.<\/p>\n
After Sept. 11, U.S. support to Indonesia has indeed widened
\nfrom financial assistance to military assistance, including what
\nseems to be the gradual relaxation of the U.S. military embargo
\non Indonesia.<\/p>\n
Continual IMF assistance to Indonesia is important for two
\nmain reasons. Firstly, IMF's \"seal of approval\" on the Indonesian
\ngovernment's economic policy is necessary to help ensure
\nfinancial support from the rest of the international donor
\ncommunity: the World Bank, Asian Development Bank, etc. Hence,
\nthe direct impact of IMF support is a budgetary impact.<\/p>\n
The second reason why IMF support is necessary for us is that
\nthe \"IMF economic program\" is seen as a \"market benchmark\" to
\njudge whether the Indonesian government is doing the \"right
\nthings\". Market players' focus on the implementation of the IMF
\nprogram, which determines relations between the IMF and
\nIndonesia, should not be underestimated.<\/p>\n
A Bank Indonesia survey reveals that the rupiah exchange rate
\nis determined mainly by two factors. One, the Indonesian
\npolitical situation, and two, the government's relations with the
\nIMF. Hence, if the political situation is stable and Indonesia's
\nrelations with the IMF are good, the rupiah is likely to be
\nstable or likely to strengthen.<\/p>\n
This perception is supported by evidence. Earlier this year,
\nthe sale of Bank Central Asia, which was part of the IMF program,
\ngreatly helped strengthen the rupiah from 10,400 at the end of
\nlast year, to 9,000 to the US dollar.<\/p>\n
With an international environment that is becoming positive
\nfor Indonesia, why is our economy growing at only 3 percent to 4
\npercent a year compounded by an alarming decrease of foreign
\ninvestment?<\/p>\n
The answer is that we basically have six structural obstacles
\nto rapid economic recovery: (1) political uncertainty; (2) a
\nparalyzed banking sector; (3) a technically bankrupt corporate
\nsector; (4) an ineffective legal system; (5) lack of confidence
\namong Indonesia's own economic elite; and (6) poor foreign
\ninvestor confidence.<\/p>\n
To remove these obstacles, Indonesia must introduce serious
\nstructural reforms, ranging from legal reforms to redefining
\nregional autonomy. The tasks may take years, if not a whole
\ngeneration, to complete.<\/p>\n
However, these changes are absolutely crucial if Indonesia is
\nto once again become a \"haven\" for foreign or domestic investors.<\/p>\n
Therefore current world events may present an opportunity for
\nus to speed up economic recovery as long as Indonesia does more
\nto make herself attractive amid increasing global competition for
\ninvestment capital.<\/p>",
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