Rupiah -- one year after its float<\/p>\n
This is the second of two articles prepared on the basis of
\nformer Bank Indonesia (BI) governor J. Soedradjad Djiwandono's
\naddress at a luncheon organized in Jakarta by the Indonesia
\nAustralia Business Council on Aug. 11.<\/p>\n
JAKARTA: After some flip-flop implementation of the IMF-
\nsupported program with a record of four letters of intent in
\nseven months and the social unrest spearheaded by continuous
\nstudent demonstrations, the confidence problem was shifting to
\nthe national leadership, not just the economy.<\/p>\n
When former president Soeharto was still in power, the
\nquestion was in his sincerity in implementing the difficult
\nprogram. Actually, the closing of the 16 insolvent banks was
\nlauded by the market, the foreign market in particular. But
\ndomestically, the closing of banks was badly received. It even
\ncaused a further loss of confidence in the banking system. And
\nwhen some intervention by the government on the execution of the
\ndecision on bank closures was suspected, the foreign market
\nstarted to react negatively. This basically transformed the
\nbanking sector from a state of distress into crisis when market
\nconfidence was almost completely lost.<\/p>\n
The negative reaction on the implementation of the program was
\nmore pronounced when some reversal of the decision on the
\npostponement of a number of big government projects was
\nannounced, plus the reappearance of monopoly practices and
\nseveral other inconsistencies in the implementation of programs
\nfor restructuring the real sector. This was how the market
\nconfidence in the government commitment to the program for
\neconomic restructuring evaporated.<\/p>\n
As a result, the rupiah's downward slide was not just
\ndifficult to stop, but the economic crisis was rapidly shifting
\ninto a total crisis in a downward spiraling process. Soeharto had
\nto pay dearly for not addressing the problem straight on by
\nresigning in humiliation on May 21, 1998.<\/p>\n
In close to three months after his unexpected elevation as the
\nnew president, B.J. Habibie has been surprising many people as a
\nnational leader who has been trying very hard to do and say
\nthings that are politically correct.<\/p>\n
He has made some success on this score. But has he been
\nsuccessful in eliminating the loss of confidence in the national
\nleadership to be able to lead the government and the nation to
\nimplement the national program of restructuring the economic and
\npolitical lives in Indonesia? Well, maybe, raising this question
\nat present is a bit unfair. On the other hand, so many problems
\nIndonesia is presently confronting cannot wait for the right
\nsolution.<\/p>\n
Despite the good publicity that President Habibie has been
\nreceiving so far, the market has not been impressed with his
\nleadership. Economic problems have not been abating.<\/p>\n
In fact, statistics on macroeconomic indicators have shown a
\ngloomier picture in terms of the growth prospect of the gross
\ndomestic product (GDP), the inflation rate, the budget deficit,
\nthe situation for food and other basic commodities. The rupiah
\nhas been strengthening somewhat, possibly due to some encouraging
\nnews about the US$8 billion loan for fast disbursement from the
\nConsultative Group on Indonesia (CGI) recently.<\/p>\n
But the bad news from Japan and its implication for Asia, and
\nthe still unclear government position about some social issues,
\nseem to cause a lukewarm attitude of the market so far. Investors
\nand creditors keep saying that they still want to wait for the
\nsocial and political situation to return to stability first
\nbefore they are willing to invest in or lend to Indonesia.<\/p>\n
They trust the long-term potential but (want to) wait for some
\ntime before resuming their activities in Indonesia.<\/p>\n
In other words, despite the good public reception on some
\nstatements or steps that President Habibie recently made,
\nquestions are still being raised on whether he is sincere, on
\nwhether he can deliver.<\/p>\n
After a year of distress and crisis, the Indonesian economy at
\npresent has not seen the light yet. Statistics of economic
\nindicators are difficult to hold on to because of so many
\nuncertainties.<\/p>\n
However, some available macroeconomic indicators show a somber
\neconomic picture which promises to get worse before getting
\nbetter.<\/p>\n
The turmoil in the last 12 months has resulted in a drastic
\nslide of almost all economic activities.<\/p>\n
Some data released recently by the Central Bureau of
\nStatistics showed that the annualized economic contraction for
\nthe first semester of 1998 was a little over 12 percent. And for
\n1998, it will be more than 13 percent.<\/p>\n
The inflation rate for 1998 will be more than 80 percent,
\nunemployment 17 percent and the number of the population living
\nbelow the poverty line will increase from 22 million to 80
\nmillion. The rupiah has depreciated by more than 80 percent since
\nJuly last year, or more than 20 percent since President Habibie
\ntook charge, while the budget deficit will be ballooning.<\/p>\n
The crisis has hit the Indonesian economy so hard that, after
\na year, the economy has turned from continued high growth with a
\nstabilizing tendency into a slump.<\/p>\n
The picture of the Indonesian economy at present is not very
\nclear, confusing for many, and frustrating for those who are
\ninterested in contributing to finding a solution to the
\npertaining problems.<\/p>\n
Indonesia has been suffering from a problem which initially
\nwas clearly a currency or an exchange rate problem, but through
\ntime and the contagion process, has become a economic, social and
\npolitical crisis.<\/p>\n
As mentioned before, the crisis that the national economy has
\nbeen confronting in the past year has become so complicated that
\none may have difficulty in separating the causes from the
\nconsequences.<\/p>\n
However, it is crucial that Indonesians should recognize the
\nproblems clearly before pursuing a program to address the
\nproblems effectively.<\/p>\n
To get the economy back to normal, Indonesia has to be out of
\nthe crisis first. However, to be able to get out from the crisis,
\nit has to have a clear picture of the whole problems, the link
\nbetween one particular sector and the others, including politics.<\/p>\n
This does not mean that everything has to be done at the same
\ntime, since it is impossible to solve all the problems
\nsimultaneously. Some priority has to be made to plan the path for
\nrecovery.<\/p>\n
Faced with a crisis originating from a contagion process, time
\nis of the essence, the sooner the better. The sooner the problems
\nare recognized, the sooner Indonesia will come up with good
\nprograms, and the sooner it has a good implementation -- and
\nhopefully helped by a touch of luck -- the better will be the
\nchance for success.<\/p>\n
Granted that a promise for political reform could lead to some
\nstate of stability, economic programs for recovery will have to
\ninclude steps to address the following problems.<\/p>\n
* Disciplined implementation of IMF-supported programs. With
\nthe four letters of intent, a much better understanding between
\nthe government and the fund seems to prevail. A commitment for no
\nbacksliding program implementation from the government and a more
\nadaptable attitude from the fund would be helpful.<\/p>\n
* More consistent steps on the implementation of the banking
\nrestructuring program, for the insolvent, the weak and the
\nhealthy banks.<\/p>\n
* Consistent follow-up steps on solution to corporate debts
\nand banks' debts, including trade financing and money line
\nfacility.<\/p>\n
* A fiscal and monetary stance which could support the
\nrestructuring programs without constraining stability.<\/p>\n
* Steps to revive export and tourism activities. At the time
\nthat foreign investors are still taking the \"wait-and-see
\nattitude\", campaigning for tourism does not have to wait.<\/p>\n
These steps could be taken smoothly, provided that a progress
\nhas been made on addressing the more immediate problems of food
\nsupply and food distribution. The basic problem here is how to
\nmaintain the availability and affordability of key commodities
\nimportant to the poor.<\/p>\n
With respect to the supply problems, the foreign commitments
\nthrough the CGI and others have to be consistently implemented.<\/p>\n
But, on the distribution problems, the government has to
\nrealize the seriousness of the damage of the distribution system
\ndue to the burning, looting and raping, particularly against the
\nChinese.<\/p>\n
The fact that so many ethnic Chinese fled the country, taking
\nalong their capital, has been very damaging to the distribution
\nsystem due to their prominent role in this business.<\/p>\n
Without some assurance about their safety from the government
\nwith its security forces, it seems to be unrealistic to expect
\nthem to come back and resume their businesses. The government
\nprogram to enhance the small businesses and cooperatives will
\ntake time, if it is implemented effectively. We do not see any
\nproblem to design a reservation scheme to create a better balance
\nfor a more sustainable business climate in Indonesia in the
\nfuture, encompassing all potential in a competitive market.<\/p>\n
But the linchpin of all the above issues is still the
\nstability of the rupiah at a reasonable rate.<\/p>\n
Some progress has been made by the government in addressing
\nthe pressing problems, but the market keeps waiting to make any
\npositive move. This actually means that somehow \"a turnaround\"
\nstill has to come before the market players -- the buyers,
\ninvestors and creditors -- are willing to give positive responses
\nto the development of the Indonesian economy.<\/p>\n
The positive response from the market has to be preceded by a
\npositive perception, which has not come out yet. Positive
\nperception could come when market confidence is back.<\/p>\n
John Maynard Keynes showed 62 years ago the importance of
\nconfidence in an investment decision, aside from marginal
\nefficiency capital.<\/p>\n
However, it is difficult to define what confidence really
\nmeans. Indeed market confidence is crucial. Confidence is very
\ndifficult to describe. When the confidence is present, the market
\nis not very demanding. However when it is lost, everything done
\nis not good enough -- the market is extreme.<\/p>\n
The turnaround has to be produced by the government by showing
\nthe market how the government views the whole problems facing the
\ncountry and a credible program to be implemented. This has to be
\ndone to get public support for the implementation of the program.<\/p>\n
Most important is to change the negative perception of the
\nmarket -- in other words, to get rid of the confidence problem,
\nto change the market's wait-and-see attitude -- to become
\npositive. After that, a consistent implementation of the program,
\nplus hopefully that touch of luck, and the long path toward
\nrecovery could be assured.<\/p>\n
Window: Indonesia has been suffering from a problem which initially
\nwas clearly a currency or an exchange rate problem, but through
\ntime and the contagion process, has become a economic, social and
\npolitical crisis.<\/p>",
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