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.