The rock and the hard place<\/p>\n
JP Morgan Chase & Co. foresees the rupiah appreciating to as
\nstrong as 8,500 against the US dollar later this year, from 9,100
\nlast week, on expectations that Indonesia's economic growth will
\naccelerate next year. The Fitch and Standard & Poor's rating
\nagencies are equally bullish about Indonesia's economic outlook,
\nupgrading the country's credit rating on the back of strong
\npolitical stability. The Jakarta stock market has also been
\nincreasingly bullish.<\/p>\n
These positive developments are the early benefits of the
\norderly and peaceful presidential election and the overwhelming
\nvictory of Susilo Bambang Yudhoyono, who is widely seen as the
\nmore capable leader for bringing the nation out of its economic
\ndoldrums.<\/p>\n
However, despite his strong political mandate, and even though
\nSusilo will inherit a more stable Indonesia with stronger
\npolitical and macroeconomic stability than the turbulent
\nsituation Megawati Soekarnoputri took over in mid-2001, the new
\npresident will immediately face formidable challenges requiring
\npainful reform measures.<\/p>\n
In fact, given the dire economic condition he is facing and
\nthe people's expectation for immediate, concrete results, Susilo
\nwill find himself squeezed between a rock and a hard place.<\/p>\n
While some populist measures may be necessary during his
\nhoneymoon period, which will be very short indeed, Susilo will
\nnot have any leeway for dispensing political goodies or business
\nfavors. Most of the measures on his agenda of the most pressing
\nproblems confronting him during the first three months of his
\nadministration will require further sacrifices from the people
\nand even his campaign team<\/p>\n
First of all, Susilo may have to disappoint most members of
\nhis core campaign team who are hoping for political appointments
\nor are expecting business favors in return for their hard work or
\ncontributions. Since Susilo has imposed very tough requirements
\non his working team -- including integrity, proven ability and
\nexpertise -- he may have to recruit from outside his inner circle
\nfor most of his Cabinet ministers.<\/p>\n
The new government will have to work fast with the House of
\nRepresentatives, which has vowed to put the government under a
\ntough system of checks and balances, to complete the 2005 budget
\nfor implementation in January. And since global oil prices are
\nnot likely to fall below US$40 per barrel throughout next year,
\nand will surely remain much higher than $24 per barrel -- the
\naverage price originally assumed for the next fiscal year -- the
\nestimate for the fuel subsidy will have to be revised upward.
\nThis in turn will require steep increases in domestic fuel
\nprices, and in turn significant rises in electricity and
\ntransportation rates.<\/p>\n
Further delay in the adjustment of fuel prices, or too low an
\nincrease of prices, could please the public, but would undermine
\nthe process of fiscal consolidation and damage the credibility of
\nSusilo's fiscal management in the perception of the international
\nmarket. Such a negative assessment would adversely affect market
\nconfidence in the country's economic prospects.<\/p>\n
The 2005 state budget should therefore provide strong signals
\nand clear direction regarding the new government's fiscal
\npolicies, foreign borrowing and resource allocation to support
\ngrowth acceleration, one of the top priorities Susilo promoted in
\nhis campaign.<\/p>\n
Foreign debt management has become much more pressing because
\nthe country is no longer entitled to debt rescheduling from the
\nParis Club of sovereign creditors, to which the government owes
\nthe bulk of its estimated $75 billion in foreign debts.
\nConsequently, official capital flows have been negative since
\n2003.<\/p>\n
The new government will have to tackle this foreign debt issue
\nat a meeting with the Consultative Group on Indonesia -- the
\nWorld Bank-coordinated creditor consortium -- in December. The
\ndilemma, though, is that there has been increasingly strong
\npolitical pressure to slash new foreign borrowing at a time when
\nforeign debt servicing burdens have risen sharply.<\/p>\n
Even Indonesia's economic growth target of 5.4 percent next
\nyear may be too optimistic, as the global economy is not expected
\nto be as vibrant as over the past three years due to the steady
\nrise in international oil prices. Our exports, already threatened
\nby the end of the quota system in the global textile and garment
\ntrade in January, may decline sharply. This in turn would affect
\nthe pace of growth and the creation of jobs, as exports are one
\nof the main engines of economic expansion.<\/p>\n
It is therefore imperative for Susilo to maintain the market's
\nconfidence, as it would be impossible for him to implement his
\neconomic agenda, no matter how politically acceptable, under
\ninimical market conditions.<\/p>",
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"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
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