Address investor confidence amid uncertainty, slowdown

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.