Preventing a crisis<\/p>\n
The package of measures announced after the monthly cabinet
\nmeeting on Wednesday once again proves the crisis management
\ncapability of the Indonesian government. It is, nevertheless, too
\nearly to gauge the full impact of the move on the market
\nsentiment and investor confidence.<\/p>\n
At first glance, the package, though short of badly-needed
\nefforts to abolish market distortions such as monopolistic
\npractices, is still commendable because it does not include
\nantimarket measures.<\/p>\n
Given the track record of the government's policy-making
\nmechanism, we have to wait and see what the final agenda of
\naction will be after the internal \"struggle\" among cabinet
\nministers, on one hand, and between ministers and politically
\nwell-connected conglomerates, on the other.<\/p>\n
But plans for a downward revision of the government's
\ninvestment spending -- to offset an expected decrease in
\nrevenues--, to cleanse the financial industry of structurally
\nweak banks and to curb imports of consumer goods will give a
\nstrong signal to the market that the government is serious about
\ntackling the currency turmoil.<\/p>\n
These measures will prevent a budget deficit and a major
\nbanking crisis and curb the growth of the current account
\ndeficit.<\/p>\n
The lifting of the limit on foreign purchases of shares at
\ninitial public offerings (IPO) will help reinvigorate the capital
\nmarket. It will also pave the way for new IPOs in the pipeline
\nwhich have been postponed due to the depressed condition of the
\nstock market.<\/p>\n
What our economy -- which most domestic and foreign analysts
\nstill see as fundamentally sound -- badly needs now is a positive
\nmarket sentiment and strong investor confidence to prevent a new
\nbout of massive, wild, speculative attacks on the rupiah.<\/p>\n
This will, in turn, accelerate the market process for the
\nrupiah to settle at its equilibrium rate, thereby enabling the
\nmonetary authorities to gradually ease the tight monetary
\nmeasures.<\/p>\n
In fact, the effect was already felt yesterday when the
\ncentral bank started lowering the interest rate on its one-month
\ncertificate, by 300 basis points to 27 percent.<\/p>\n
As long as the central bank's certificate rates remain above
\ntheir normal level of 8 percent to 11 percent, business
\noperations will remain at a standstill. A spate of business
\nfailures would be unavoidable and many banks, hit by bad credits,
\nwould see their asset bubble burst.<\/p>\n
As far as retrenchment in the public sector (and state
\ncompanies) is concerned, however, the ministers have yet to
\nnegotiate which projects should go. Rationally, projects with
\nlarge import requirements and which are not immediately required
\n-- such as the aircraft development program, big power projects,
\nthe national car program, office buildings and even public
\ninfrastructures -- must be the first to be axed.<\/p>\n
How far the government goes with its retrenchment program and
\nits choice of projects to be shelved or postponed, will determine
\nthe credibility of the government policy.<\/p>\n
Its consistency in dealing with structurally weak banks will
\nalso be crucial for restoring investor confidence in the long-
\nterm outlook of the economy.<\/p>\n
Unfortunately, the central bank has often been criticized for
\nbeing highly vulnerable to political pressure. This is clearly
\nreflected in the haphazard manner in which Bank Indonesia has
\nbeen tackling several problem banks over the last few months.<\/p>\n
Minister of Finance Mar'ie Muhammad did announce that serious
\nefforts would be made to eliminate various constraints on
\neconomic activity and remove the causes of a high cost economy.
\nMar'ie did not provide specific details.<\/p>\n
We no longer hear anything about the purported \"great news\" a
\nfew weeks ago from Coordinating Minister of Economy and Finance
\nSaleh Afiff regarding the abolishment of trading monopolies in
\nseveral basic food commodities, except rice. We suspect Afiff
\nmight have lost his battle.<\/p>\n
We realize that the run-up to the presidential election in
\nMarch is not the best time for the government to bite the bullet,
\nalbeit for the long-term good of the economy. But we still hope
\nthat the government will take a good lesson from the currency
\nturmoil and work harder to remove the structural weaknesses in
\nthe economy.<\/p>\n
Further delay in the resolution of these weaknesses will
\nsooner or later expose our economy to an even more punitive
\njudgment by the market.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/preventing-a-crisis-1447893297",
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"sponsor": "Okusi Associates",
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