The market remains calm<\/p>\n
With most government leaders, from the President and Vice
\nPresident on down to Cabinet ministers and other senior
\nofficials, seemingly preoccupied with campaigning for their
\nrespective political parties, the economic management of the
\ncountry appears to have been running on automatic pilot over the
\npast eight days.<\/p>\n
However, thanks to strong macroeconomic stability and an
\nelection campaign that has so far been devoid of violence and
\nsecurity disturbances, the market has remained calm.<\/p>\n
Both the rupiah and stock market did show a downward trend
\nearlier this week but the fluctuations were moderate, reflecting
\nmildly speculative transactions that were needed in any case to
\nmaintain market liquidity and turnover.<\/p>\n
Bids for Rp 2 trillion (US$235.3 million) worth of rupiah
\nbonds on Tuesday exceeded Rp 5.67 trillion, resulting in an
\naverage yield of 11.57 percent, lower than the 11.82 percent
\ngained by similar T-bonds issued last month. The strong demand
\nfor the eight-year bonds, even with a fixed coupon rate of only
\n11 percent, is another indication of the market's confidence both
\nin the government and the future outlook of the economy.<\/p>\n
If campaigning over the next 15 days remains peaceful and the
\nlegislative and presidential elections in April and July go off
\nwithout a hitch, we are confident the economy will do just fine,
\neven if a second round of the presidential election is needed in
\nSeptember.<\/p>\n
The relatively strong macroeconomic stability should be
\nattributed to the fiscal discipline of the government and correct
\nmonetary management by the politically independent central bank.<\/p>\n
Major political parties did increase spending on campaign
\nactivities to woo voters, but there is nothing wrong with a
\nspending spree once every five years because the government seems
\nable to refrain from short-term, narrow-minded populist measures.
\nIt also appears strong enough not to resort to distributing
\npolitical goodies to win votes at the expense of the long-term
\nprospects of the economy.<\/p>\n
The fairly calm market reflected market expectations and
\nperceptions that economic management will remain on the right
\ntrack during the election year. This positive perception, in
\nturn, was generated by market trust in the government's policy-
\nmaking capabilities and its determination to push ahead with its
\nreform agenda, as stipulated in the government White Paper of
\nSeptember 2003.<\/p>\n
All this, we think, forms the automatic pilot that will guide
\neconomic activities throughout the election year.<\/p>\n
The market also is comfortable that none of the major parties
\nthat are most likely to win a respectable number of seats in the
\nHouse of Representatives have any intention of fundamentally
\nchanging the current market-based economic development. Some
\nparties are promoting a package of economic policies they promise
\nto pursue, but the policies by and large only fine-tune the grand
\neconomic strategy the government has implemented since 2001.<\/p>\n
Moreover, the market trusts the monetary management of the
\ncentral bank, fully assured by its anti-inflation measures and
\nthe consistency of its monetary policy to steadily lower interest
\nrates to stimulate economic activity.<\/p>\n
Certainly, the government should continue its fiscal
\ndiscipline and push ahead with its reform agenda. Likewise, the
\ncentral bank should maintain market trust in its monetary
\nmanagement and in the direction of its monetary policies. This is
\nthe only way to maintain the market's trust during the highly-
\npoliticized period of the elections.<\/p>\n
On top of that, the central bank should be extra careful about
\ndevelopments in the foreign exchange market, and remain ready to
\nintervene whenever necessary to beat off excessive speculative
\nactivities aimed at pushing down the rupiah.<\/p>\n
It is, we think, crucial for the central bank to maintain the
\nrupiah at what it likes to call the comfort zone of Rp 8,200 to
\nRp 8,700 to the dollar. This range is considered conducive for
\nmaintaining the price competitiveness of exports, yet not too low
\nas to induce inflationary pressure from imports.<\/p>\n
It would be understandable if the pace of reform slackened a
\nbit as most members of the House were preoccupied with election
\ncampaigning. That is simply expected in a country engaged in a
\ngeneral election.<\/p>\n
But as long as policy consistency and the fundamental elements
\nof macroeconomic stability are maintained, the economy will be
\nable to weather the upcoming period of heightened political
\nemotion.<\/p>",
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"sponsor": "Okusi Associates",
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