A new reality

With the local currency market still in the doldrums, many people were obviously looking for comforting words and clues as to future government policy on the issue from President Soeharto's State of the Nation Address on Saturday.

No one knows for certain where the market is heading now after Bank Indonesia floated the rupiah Thursday; and the impact on the economy from the nearly 20 percent depreciation of the rupiah against the dollar these past two weeks is not yet fully known. But as an indication of things to come, prices of imported consumer goods have already started rising.

President Soeharto, as expected, addressed the currency problem in his speech. He described the fluctuations in the rupiah's exchange rate as a new economic reality, something that the nation, particularly the business community, should adjust to. Indonesia is increasingly becoming more susceptible to the negative excesses of an open economy, like the currency contagion that has hit other Southeast Asian countries these past weeks.

Soeharto gave little away as to the government's immediate plans, but it was comforting to hear that he sees the volatility as temporary. With the right policy, he said, the rupiah should settle at a new equilibrium. His optimism was founded on the strong fundamentals of the Indonesian economy.

The economic figures, as presented in the speech, looked as healthy as one could expect. Inflation in the year ending in March was running at 5.2 percent, the growth of imports was halved to 10.4 percent, and there were signs that export growth is rebounding. Indonesia's current account deficit has been growing at a slower rate, and the size of the deficit is still among the lowest in the region. The country's foreign exchange reserves are sufficient to finance more than five months of import needs. Finally, Indonesia's economy grew by 7.98 percent in calendar 1996, an upward revision from the earlier official figure of 7.82 percent.

Soeharto tampered his optimism with caution in that Indonesia's overall debt service ratio remains high, propped up mainly by the rapid growth of private sector offshore borrowing. His message is that the private sector should be more prudent in deciding to take up new foreign loans.

It remains to be seen how quickly the nation will adjust to the new reality. The government has already taken measures to soften the blow, but whether they are sufficient is something that only time will tell.

While there are reasons for optimism given the economy's strong fundamentals, there can be no room for complacency anymore. We recall that when the currency crisis attacked Thailand, the Philippines and later Malaysia, some officials smugly dismissed the likelihood of Indonesia being affected. Events since then have proved they were too confident.

For now, Indonesia may have averted an even bigger crisis, thanks to the strong economic fundamentals. But we cannot take for granted that they will remain strong forever. This is something that Indonesia must continue to work on as it adjusts to the new reality of being an open economy.

The strongest message this crisis has sent is that as a fully- fledge member of the global economy, Indonesia is subject to the forces that determine the pace of the world's economic growth. This means that all its economic policies must comply with the internationally accepted rules of the game, if it is to survive the fierce competition and reap the benefits of the expanding global economy.

Unfortunately, this is a reality that has yet to fully sink in in this country. The government appears to have slowed the pace of its deregulation and debureaucratization drives. At times, it even gives the impression of caving in to big business by reverting back to its old practices of monopolies and protectionism. We hope this impression, like the currency crisis, will not last long.