Brittle confidence<\/p>\n
Finance Minister Boediono chartered out a much brighter
\neconomic outlook for next year but the macroeconomic assumptions
\nhe proposed in the preliminary deliberations with the House of
\nRepresentatives on the state budget plan for 2003 still very much
\nreflects the brunt of the five-year old economic crisis.<\/p>\n
Boediono ventured a high estimate of 6 percent growth in terms
\nof gross domestic product (GDP), as against 4 percent this year,
\nlargely on the back of an improved political and security
\ncondition and a global recovery which would help bolster
\nIndonesian exports.<\/p>\n
He was especially buoyant about the strong (10 percent)
\nappreciation of the rupiah against the American dollar in the
\nfirst five months but his low and high estimates of the local
\nunit for next year, Rp 8,500 and 9,500 respectively, are still
\nover 70 percent lower than the pre-1997 crisis level. They even
\nreflect a significant depreciation from the Rp 7,100 level
\nalready reached in December, 1999, Rp 8,025 in 1998 and Rp 7,900
\nat the end of 2001.<\/p>\n
These developments show how fragile the macroeconomic
\ncondition still is and how the economic-crisis management has
\noften swerved off the right track due to backtracking on and
\nreversal of reform measures. This policy inconsistency resulted
\nin one step forward being followed by two steps backward within
\nthe economic reform and caused high volatility in market
\nconfidence.<\/p>\n
A similar trend took place in the developments of interest
\nrates. The 12.50 percent to 14.50 percent benchmark interest
\nrates estimated for next year, compared to almost 16 percent
\nnow, are even still much higher than the average 11.50 percent
\nalready achieved in the first six months of 2001, let alone the
\npre-crisis level of 10 percent. True, like the rupiah which
\nsignificantly strengthened this year, the projected interest
\nrates are considerably lower than the 17 percent prevailing
\nbetween July, 2001 and January, 2002. Yet, they do not really
\nbear out improvement from what had actually been achieved in
\nprevious years.<\/p>\n
We deliberately cite the two indicators not only because the
\nrupiah and interest rate are highly sensitive to market
\nsentiment. They are two variables which are greatly influential
\nto macroeconomic stability and to the state budget. The rupiah
\nrate manifests the extent of wealth destruction after the crisis,
\naffecting both foreign debt service burdens and the
\ncompetitiveness of the manufacturing sector that still depends
\nlargely on imported materials, intermediate inputs and
\ncomponents.<\/p>\n
Likewise, the interest rate level influences the domestic debt
\nservice burdens and the costs of business operations and, most
\ndamaging of all, could stifle a sound recovery of the banking
\nindustry.<\/p>\n
These developments make it crystal clear that what is vital
\nfor regaining and maintaining market confidence to generate a
\nsustainable recovery is a steady, if small, progress within the
\neconomic reform drive as this creates certainty about the
\ndirection of the economic management.<\/p>\n
Boediono's GDP estimate of six percents seems too high, except
\nif the recovery of the distressed assets held by the Indonesian
\nBank Restructuring Agency, corporate debt restructuring and
\nprivatization of state companies can be accelerated. Without
\nsignificant progress in these three programs, the real sector
\nwill remain feeble, new investors will remain on the sideline,
\nmany industries will continue to operate below designed capacity
\nand the banking industry will remain fragile, exposed to
\nunusually high risks.<\/p>\n
Only new investors can bring back the distressed assets and
\nstate companies to higher productivity with a stronger
\ncompetitive edge either through technology improvement or product
\ndiversification. Corporate debt restructuring is surely a key to
\nreinvigorating economic activities. Companies that are hostage to
\ntheir bad debts will remain closed to credit lines, thereby
\nunable to raise operation rates. This condition will deprive
\nbanks of creditworthy borrowers to plough their excess liquidity
\nand will prolong their reliance on the interest revenues from
\ntheir government bonds<\/p>\n
The government is well advised to realize that it is now
\nextremely difficult to woo new investment to green-field
\nprojects in the manufacturing sector due to the excess capacity.
\nThe most prospective avenue for capital inflows now is the
\nacquisition of the distressed assets and sale of viable state
\ncompanies. This is something that politicians should also be
\nhighly aware of, especially because the situation next year will
\npredictably be highly politicized in the run up to the 2004
\ngeneral elections. Whipping up narrow-minded nationalistic
\nsentiment against foreign investors to gain popular support would
\nonly damage the economic outlook.<\/p>\n
So all in all, the challenge ahead remains uphill. The
\ngovernment should capitalize on the progress achieved in the
\nfirst five months of this year to maintain the momentum of market
\nconfidence by accelerating confidence-building measures. But the
\ngovernment should also realize that the overall condition is
\nstill highly brittle and under this situation, when things start
\ngoing wrong they could easily descend into a new bout of panic
\nand a deeper crisis.<\/p>",
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