Soedradjad's warning<\/p>\n
The warning sounded last week by Bank Indonesia's (central
\nbank) Governor Soedradjad Djiwandono about the tendency of the
\neconomy to overheat should get adequate responses from other
\ngovernment agencies and businesspeople before the external
\nbalance shows signs of crisis. True, the developments, as
\nSoedradjad explained at a banking seminar, are not yet a sign of
\ncrisis but it is a definite warning signal.<\/p>\n
Soedradjad cautioned that rapidly expanding economic
\nactivities have caused the monetary growth to exceed targets set
\nby the monetary authority, to maintain stability, curb inflation
\nand to reduce the pressures on the balance of payments. That has
\nforced domestic interest rates to remain high.<\/p>\n
Even though the 6.8 percent cumulative inflation rate during
\nthe first nine months was lower than the 7.4 percent in the same
\nperiod last year, and the June trade deficit of US$205 million
\nwas reversed into a surplus of $362 million for July, the
\nsituation is still a cause of great concern.<\/p>\n
First of all, the cumulative trade surplus for the first seven
\nmonths of this year was much lower than that in the corresponding
\nperiod last year, due to the very high growth (29 percent) of
\nimports.<\/p>\n
The sharp increase in imports, partly caused by the robust
\npace of new investments, has been causing greater pressure on the
\nbalance of payments. Soedradjad acknowledged that the current
\naccount (balance of commodity and service trade) in the balance
\nof payments may end up with a much larger deficit than last
\nyear's US$3.1 billion. Some analysts even forecast the current
\naccount deficit to reach as much as $8 billion, or six percent of
\nthe gross domestic product. That is much higher than the 2.5
\npercent target set by the government as a sustainable level.<\/p>\n
The impact of the upward trend in the current account deficit
\ncan still be contained by the high pace of capital inflows, both
\nthrough foreign direct investment and portfolio capital. Heavy
\ndependence on portfolio investments, which are highly speculative
\nin nature, makes the country highly vulnerable to uncertainty,
\nwhich has often been the main hallmark of the international
\nfinancial market of late. Jittery investors could suddenly
\nwithdraw their capital simply because of wild rumors, which have
\nnothing to do with the fundamentals of the country's economy.<\/p>\n
That is why, we feel, export promotion becomes even more
\nimperative and that calls should be made for concerted efforts to
\nremove high cost components in the production and trading
\nsectors. This suggestion sounds like the same song over again,
\nespecially because a great portion of the economic growth has, of
\nlate, been spurred by the domestic market demand. However cliche
\nmay be the suggestion, the warning is loud and clear.<\/p>\n
The dependence on portfolio capital, to cushion the impact of
\nthe widening current account deficit, also makes it more
\nimperative for the government to remain consistent with the
\nspirit of its economic and bureaucratic reform and to continue
\nderegulation packages. Inconsistencies, however short term they
\nmay be, would provide the wrong signal to investors, which would
\ncause double blows: Stopping, or sharply reducing capital inflows
\nand setting off capital flight.<\/p>",
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"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
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