Macroeconomic condition remains fragile<\/p>\n
The panel of economists' verdict was unanimous. Indonesia's
\neconomy, deprived of its external locomotive, would likely expand
\nby only 3.1 percent or, at best, by 4 percent in 2002.<\/p>\n
That growth, while still respectable compared to other
\ncountries in East Asia, except China and Vietnam, was
\nnevertheless far from sufficient to accommodate the 2.5 new job
\nseekers entering the market every year, not to mention the almost
\n6 million fully unemployed and 32 million underemployed.<\/p>\n
Growth below 5 percent was considered far from adequate to
\nrepair the damages inflicted by the economic contraction of
\nalmost 14 percent in 1998 and zero growth in 1999.<\/p>\n
The tasks ahead would not be easy even though the political
\ncondition would be much more stable than during the first seven
\nmonths of this year. The reform agenda itself was long and
\ncumbersome as it had to be implemented in a much more difficult
\nenvironment.<\/p>\n
Managing the far-reaching damages of the Sept. 11 terrorist
\nattacks on the United States would impose additional burdens. For
\nthe first time since the onset of the crisis in late 1997, the
\nhuge domestic risks that Indonesia faced have now increased by a
\nnew layer of equally dangerous external risks, with a more
\nprolonged and deeper downturn in the global economy.<\/p>\n
One panelist came with three scenarios of growth (in terms of
\ngross domestic product) ranging from 3.1 to 4 percent for 2002.
\nFirst scenario: GDP growth would reach only 3.1 percent, lower
\nthan the 3.5 percent estimated for this year, if the American
\neconomy contracted by 0.3 percent and the Japanese economy
\ndeclined by 1.3 percent, the international oil price hovers at
\nUS$21 per barrel and the rupiah rate against the dollar averaged
\n10,000.<\/p>\n
Second scenario: GDP growth will be 3.4 percent if the U.S.
\nand Japanese economies were flat with 0.6 percent and 0% percent
\ngrowth, respectively, the international oil price averaged $22
\nper barrel and the rupiah rate against the dollar averaged 9,500.<\/p>\n
Third Scenario: GDP growth would reach 4 percent if the
\nassumptions in the second scenario materialized and the
\ngovernment could increase its investment by 10 percent in real
\nterms (adjusted for inflation).<\/p>\n
\"But I think the best the economy can do next year will be
\ncontinuing to muddle through the adverse domestic and external
\nenvironment,\" the panelist added.<\/p>\n
All panelists agreed that the unenviable financial situation
\nthe government inherited imposed severe constraints on what could
\nbe realistically achieved. Strong vested interests, weak
\ninstitutions, and a turbulent political transition with ill-
\ndefined boundaries between the three branches of government and
\nthe ongoing ambitious decentralization process made the task
\nunusually difficult.<\/p>\n
A too adversarial attitude on the part of the House of
\nRepresentatives was blamed for the delay of many reform measures
\nas legislators had tended to intervene in almost any deal the
\ngovernment intended to make.<\/p>\n
Indonesia's dire economic straits demanded fast decisions on
\nasset recovery, privatization, legal reforms, civil service and
\njudicial reform. However, a democratic and decentralized system
\nrequired new decision-making procedures that implied a more
\ncomplex and demanding environment for policy making.<\/p>\n
The panelists shared great concerns about the severe lack of
\ngovernment funds as its revenues would continue to be much
\nsmaller than its spending, which had risen steeply due largely to
\ndebt service burdens.<\/p>\n
The high government indebtedness certainly rendered the
\neconomy highly vulnerable to rupiah and interest rate movements
\nand severely restricted the government's ability to respond to
\nnew shocks.<\/p>\n
\"What makes things even more formidably challenging is that
\nthe biggest spending items in the state budget, interest on
\ndomestic debts and installments on foreign debts, are inflexible
\nin that the expenditures provide no room for retrenchment,\"
\nanother panelist noted.<\/p>\n
Domestic and foreign debt service burdens alone would take up
\nRp 128.5 billion ($12.2 billion) or almost 45 percent of the Rp
\n289.4 trillion domestic revenues expected next fiscal year. As
\nthe central government personnel costs would total Rp 40.6
\ntrillion, subsidies for fuel and other basic needs Rp 46.6
\ntrillion, grant allocations for the regions Rp 90.3 trillion and
\ngoods procurements Rp 11.5 trillion, there would be a shortfall
\nof about Rp 28.5 trillion to cover even just the current
\nspending.<\/p>\n
Only proceeds from asset sales, including privatization, and
\nnew foreign loans would enable the government to allocate Rp 47.1
\ntrillion for investment. But this investment budget would be a
\nmere 4 percent nominal increase from that budgeted this year.
\nIn real terms (adjusted for the 12 percent inflation estimated
\nfor this year), the public sector investment would decline by
\nabout 8 percent.<\/p>\n
But even the assumptions of revenues from the asset sales were
\nhighly vulnerable because, for the current fiscal year for
\nexample, only about Rp 3.5 of the Rp 6.5 trillion expected from
\nprivatization could be realized. Worse still, $1.7 billion of the
\n$2.6 billion in foreign program loans budgeted this year could
\nnot be disbursed due to the government's failure to meet policy
\nreform targets.<\/p>\n
For the next fiscal year, the disbursement of $1.3 billion of
\nthe $3.1 billion in new foreign loans pledged by the Consultative
\nGroup on Indonesia creditors would also be contingent upon policy
\nperformance, an area where the government's performance had
\nalways been poor.<\/p>\n
In the absence of any fiscal stimulus, the private sector
\ninvestment should become the locomotive. The problem, though, was
\nthat these investors remained jittery about the business
\nenvironment in Indonesia due to unstable security conditions and
\nweak law enforcement.<\/p>\n
\"No amount of tax holiday and other fiscal incentives will
\nhelp woo investments if the risks of doing business in the
\ncountry remain unusually high as they are now due to unstable
\nsecurity condition and law uncertainty,\" a panelist asserted.<\/p>\n
Foreign investors would not bring their money to Indonesia if
\nrich Indonesians themselves still preferred to park the bulk of
\ntheir financial assets overseas.<\/p>\n
\"Foreign investors usually comment that if your people
\nthemselves are still afraid of bringing their money back to
\nIndonesia, why should they,\" one panelist noted.<\/p>\n
A conducive investment climate also depended on progress in
\nbank and corporate debt restructuring, monetary stability and
\ngood governance and smooth fiscal decentralization within a
\nframework of overall fiscal consolidation.<\/p>\n
Macroeconomic performance would remain weak and unstable as
\nlong as the asset sale program and privatization remained at
\ntheir current slow pace since the government, notoriously known
\nfor its pervasive corruption and collusive practices, now
\ncontrolled or managed almost 80 percent of business and banking
\nassets.<\/p>\n
The panelists also were worried about what they saw as
\ndisharmony between fiscal and monetary management, lambasting the
\npersistently tight monetary policy imposed by the central bank.<\/p>\n
They warned that Bank Indonesia's political independence did
\nnot mean that the central bank was free to design its monetary
\npolicy apart from the fiscal management. They should instead sit
\ndown together to design fiscal and monetary policies in the
\ndirection of mutually agreed objectives.<\/p>\n
The recapitalized banks were not yet able to resume financial
\nintermediation due to the combination of high business risks and
\nthe 17 percent benchmark interest maintained by the central bank
\nsince the middle of this year.<\/p>\n
Small and medium-scale enterprises (SMEs) were cited as saving
\nthe economy from total collapse. As most business conglomerates
\nremained in the hospital that is the Indonesian Bank
\nRestructuring Agency (IBRA), negotiating their debt
\nrestructuring, SMEs had proven their resilience and flexibility.<\/p>\n
They could have expanded more robustly had it not been for the
\ncredit crunch, stifling bureaucratic red tape, regulatory
\nbarriers and an unpredictable policy environment.<\/p>\n
One panelist specifically pointed out the discriminatory
\ntreatment still accorded to Indonesian Chinese in spite of the
\nonset of the reform and democratization era, while their high
\nentrepreneurial spirit and high propensity to take risks could
\nhave been harnessed to fuel the economic recovery.<\/p>\n
\"The crisis has crippled only the big conglomerates, while the
\nSMEs remain alive and kicking. Unfortunately though, the SMEs
\nowned by Indonesian Chinese continue to face adverse conditions,
\nsuch as being harassed by the authorities,\" the panelist noted.<\/p>\n
He questioned how the Indonesian business sector would be able
\nto survive in the upcoming ASEAN Free Trade Area if the business
\nenvironment remained as inimical as it was now.<\/p>\n
So all in all, macroeconomic conditions remained highly
\nvulnerable to risks due to the fragile banking and corporate
\nsectors and the precarious condition of the government's
\nfinances.<\/p>\n
However, a faster pace of asset recovery, corporate and bank
\nrestructuring and privatization, supported by a more stable
\nsecurity and political condition, would generate a stronger,
\nsustainable recovery.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/macroeconomic-condition-remains-fragile-1447893297",
"image": ""
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"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
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