A buoyant economy

A buoyant economy

The economy's performance during the first six months of
President Susilo Bambang Yudhoyono's administration was fairly
impressive, with gross domestic product growing by 6.65 percent
on a yearly basis in the fourth quarter of last year and 6.35
percent in the first quarter of this year.

As chief economics minister Aburizal Bakrie explained in a 35-
page booklet, Indonesian Economic Performance, issued last week,
the quality of growth also significantly improved, with the prime
movers now consisting mainly of investment and exports. The 5.13
percent economic growth last year was generated mostly by private
and public consumption.

Investment grew by 15 percent during the first quarter of the
year, supported by a 40 percent increase in capital goods
imports, and exports expanded by 13 percent. The Jakarta stock
market was recognized as one of the best performers in the world
with its composite index gaining almost 30 percent from last
year.

These developments show that the process of the virtuous
circle within the Indonesian economy has accelerated since the
fourth quarter of last year. This in turn has markedly improved
market perceptions of the country's economic outlook and strongly
assured investors that economic recovery is increasingly robust
with stronger macroeconomic and political stability.

Several new positive developments have greatly contributed to
the speeding up of the virtuous circle, which began with the
conclusion of what the international community lauded as fair,
clean and peaceful legislative and presidential elections last
year.

First of all, the market reacted positively to the policy
direction pursued by the Susilo government and to the good
coordination between fiscal and monetary policies in controlling
inflation and defending the rupiah's stability.

The government's political courage to reduce the fuel subsidy
by raising fuel prices by an average of 29 percent in March
increased the feeling among investors and creditors that the
government was serious about strengthening fiscal consolidation.

The International Monetary Fund also praised Indonesia's
economic performance after an IMF review team completed its
latest assessment of the country's economy earlier this month.
The IMF attributed the country's robust economic growth partly to
the return of foreign investment, but warned the government that
if inflationary pressures was not controlled it could undermine
macroeconomic stability.

What made the economic report from the coordinating minister
for the economy even more reassuring was the acknowledgement of
the pitfalls that lie ahead. This indicates the government does
not plan to relax or become complacent, which is important
because the economy is still vulnerable to internal and external
shocks.

Persistently high global oil prices, a possible slowdown in
the global economy and the upward trend in interest rates in
industrialized countries are some of the external risk factors,
which are completely beyond the government's control but could
adversely affect the Indonesia's overall economic performance.

The tighter monetary policy of the United States, for example,
has prompted Bank Indonesia to raise its benchmark short-term
interest rate in a bid to maintain the attractiveness of
investment in rupiah assets, thereby preventing the local unit
from wild volatility and a sharp depreciation.

The government also correctly admitted it has yet to do much
in the way of removing high-cost factors from the economy, such
as endemic corruption, poor infrastructure, red tape and bad
governance in the private and public sectors.

Put another way, more concerted efforts are needed to
strengthen basic institutions (good governance) and to reform
microeconomic policies and supporting institutions in order to
reinvigorate investment.

The recent disclosure of a spate of bad loans and alleged
lending fraud at state-controlled Bank Mandiri, Indonesia's
largest bank, shows that the banking industry, which spent more
than US$70 billion in taxpayer money for its recapitalization,
has yet to implement operational restructuring to promote good
governance.

All in all, the economic progress the country has achieved so
far can serve as a building block for strengthening market
confidence in the government's economic management and in the
overall economic outlook -- an upbeat sentiment that can help the
economy weather the challenges that lie ahead.