Premature euphoria<\/p>\n
Economic ministers have of late been congratulating themselves
\non the remarkable signs of economic improvement over the last two
\nmonths, especially after the peaceful parliamentary elections in
\nearly June. Given the presidential election in November, the
\ntiming of the bullish indicators couldn't be better for
\nsupporters of President B.J. Habibie, who are already campaigning
\nfor his second tenure. They were, predictably, quick to
\ncapitalize on the situation, touting the impressive economic
\nindicators as a market vote of confidence for the Habibie
\nadministration.<\/p>\n
Chief economic minister Ginandjar Kartasasmita declared that
\nrecovery is already underway. He foresaw economic growth much
\nhigher than the 0.13 percent predicted by the Central Bureau of
\nStatistics for the whole year, compared to a contraction of
\nalmost 14 percent in 1998. Bank Indonesia Governor Sjahril
\nSabirin was equally bullish, predicting a single-digit inflation
\nrate, as against 78 percent last year, interest rates below 17
\npercent, down from 35 percent in January, and a rupiah range of
\nRp 6,000 to Rp 6,500 to the U.S. dollar. The composite index of
\nthe Jakarta Stock Exchange, which fell to as low as 393.62 in
\nMarch, is now hovering above 655. The financial market seems to
\nbelieve that the worst is over and the economic crisis has
\nbottomed out.<\/p>\n
However welcome and essential are the signs of recovery for
\nconfidence building, especially for the beleaguered business
\nsector, the high sense of euphoria is still premature. The more
\ndamaging it would be to the incipient recovery if the bullish
\nsentiments prompted an easing of the implementation of painful
\nreform measures. As core problems remain and the fate of the
\neconomy is being held hostage to the outcome of the presidential
\nelection in November and the credibility of the new government to
\nbe formed in December, it is doubtful whether the budding
\nrecovery will hold.<\/p>\n
Problem is indicators from economic fundamentals are not
\nheartening. Exports for the first five months were down more than
\n10 percent from the same period last year, despite the 65 percent
\ndepreciation of the rupiah. Imports in the same period decreased
\n13.3 percent, indicating persisting low capacity utilization at
\nmost manufacturing plants.<\/p>\n
Direct investment is a far more important indicator of
\nrecovery than the upbeat trend in the highly speculative
\nfinancial market. Unfortunately, new direct foreign capital
\ninflows are still negligible. Except for new small investments
\nand foreign acquisition of some assets, such as Standard
\nChartered Bank's investment in Bank Bali, foreign investors do
\nnot appear eager for local assets offered by the Indonesian Bank
\nRestructuring Agency. This is quite disappointing because assets
\nin the country should be the cheapest in Southeast Asia now,
\ngiven the almost 65-percent depreciation of the rupiah against
\nthe dollar and the 78-percent inflation last year. Asset
\npurchases by foreign investors in Thailand and South Korea have
\nbeen very much part of the fuel that generates economic recovery
\nin the two countries.<\/p>\n
The major hurdles to new direct investment in Indonesia are
\nquite obvious. The uncertainty about law enforcement and the
\nupcoming transition to a new government has made the risk of
\ninvesting in the country unusually high.<\/p>\n
Other major barriers to the recovery process are the
\nagonizingly slow pace of the bank restructuring and resolution of
\nthe US$70 billion in corporate foreign debts and Rp 235 trillion
\n($34.5 billion) in bad debts of domestic banks.<\/p>\n
As long as these problems are not resolved satisfactorily,
\nexports will remain hindered by a lack of trade financing as most
\nforeign banks will continue to shun Indonesian companies.
\nDomestic banks will also have difficulty finding viable
\nbusinesses to finance if the huge bad debt overhang is not
\nresolved. Since the almost 1,700 bad debtors, currently being
\ntreated at the IBRA 'hospital', are themselves the main players
\nin upstream and downstream manufacturing industries, the real
\nsector will remain virtually moribund, deprived of working
\ncapital, and the economic fundamentals will remain on shaky
\nground.<\/p>",
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"sponsor": "Okusi Associates",
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