Address investor confidence amid uncertainty, slowdown

Indonesia, still mired in an economic crisis, is among the countries now facing the economic impact of the Sept. 11 attacks in the United States. Mari Pangestu of the Jakarta-based Centre for Strategic and International Studies (CSIS) was interviewed by The Jakarta Post contributor A'an Suryana to share her views while she was in Canberra attending an academic conference on women's issues.

Question: Amid preparations for the war against terrorists, what is the impact of the U.S. policies and actions on the Indonesian economy?

Answer: The Indonesian economy is integrated with the global economy, which is now facing grim prospects after the massive terrorist attacks in the U.S., the largest economic powerhouse.

Confidence in the stock market, especially in the U.S., is diminishing after both the attack and President George W. Bush's plan to wage a war against terrorism. The crisis has caused nervousness among investors, discouraging them from buying firms' assets or shares in the stock markets.

Once investors are nervous, they choose safer modes of liquid investment, such as deposit or cash accounts, even though investing in the stock market promises higher returns.

Having identified this trend, analysts have predicted that the U.S. will suffer a recession next year.

The investment downturn in the U.S. will have a harmful effect on our economy because Indonesian exports to the U.S. will eventually decrease. In fact, some Indonesian exporters have complained of canceled orders from their American buyers. Garments, textiles, pulp and paper, and electronics are major Indonesian exports which could be badly affected by the recession.

The manufacturing sector could also be hit since this sector is highly integrated with the global economy. The only positive effect we might experience is from the oil and gas sector, which usually enjoys high prices any time supplies from the Middle East are disrupted by war.

Amid this global economic downturn, Indonesia may not be able to achieve its economic target of 5 percent growth next year. In the event of a war, would Indonesia see a bank panic similar to the May 1998 riots?

There was chaos in the past, but I don't think there will be massive bank runs. Bank depositors have a blanket guarantee from the government.

What should the government do to contain the impact?

The government can do nothing as the crisis is happening out there, beyond the government's ability to deal with. What the government must do is stimulate domestic demand. (To do this) the government must first restore and maintain investor confidence in the Indonesian market and the consumer market.

The government must be able to convince investors that Indonesia is attractive for investment. Today, at least two immediate problems must be solved by the government concerning investment -- first, uncertainty which is caused by lack of physical security and, second, decentralization.

Physical security is no longer a major cause for concern today, as compared to the period under Abdurrahman Wahid's government when many large demonstrations took place. However, possible massive riots are again drawing concern after the terrorist attack in the U.S..

Demonstrations against the U.S. are rampant again, and even the U.S. Embassy has sought protection from the police force, avoiding the worst possible case scenario.

Terrorist acts have again hit Jakarta (on Sunday explosions occurred at the Atrium Plaza shopping mall in Central Jakarta for the third time since 1998 -- Eds.).

The government should assure investors that it is able to deal with (terrorist acts), arrest and prosecute the perpetrators, and ensure the safety of their investments.

Many American companies today are getting very scared that they may become terrorist targets.

The second problem is that uncertainty still grips the decentralization process. A study carried out by the (Jakarta- based) research organization Smeru in 13 provinces says that regional governments have imposed various taxes or levies, which are detrimental to the business climate.

Investors have complained of inadequate enforcement of regulations and lack of coordination between central, provincial and regional administrations. The division of labor in the public administration is not clear yet and it has caused confusion among investors.

For example, investors are still confused about the administration of land titles. The law on regional autonomy stipulates that land title administration must be given to the regional governments, but the Abdurrahman Wahid administration stipulated a presidential decree empowering the central government to handle land titles. This contradictory rule obviously confuses investors interested in building plants or opening plantations.

Given the uncertainty about the global economy, Indonesia should not rely too heavily on foreign investors and should instead woo domestic investors by encouraging Indonesians, including those who still prefer to park their financial assets overseas. These businesspeople are more willing than foreign investors to take the risk as they know how things run in the country.