An ounce of prevention

An ounce of prevention

One should not read too deeply into the note of caution about
Indonesia's macro-economic stability and growth, which was
written by Bank Indonesia's (central bank) Governor Soedradjad
Djiwandono on Tuesday, or become apprehensive about the upcoming
economic trends.

Certainly, we have to take some precautions, especially
because two of the three variables that will affect the
Indonesian economic situation -- oil prices, import expansion and
yen rate volatility -- are regrettably beyond our control.

We think Soedradjad's warning is also quite opportune in view
of the rise in international oil prices over the last few weeks,
which has gone as high as US$20 per barrel. This encouraging
trend might bring about a sense of complacency regarding the
constant need for a tight fiscal and monetary policy.

We should be especially cautious in reading the latest oil
price movements because these trends have not entirely been
created by the law of supply and demand. In fact, we see that the
sharp price increase is mostly a result of production problems in
Nigeria, Yemen, Angola and Venezuela because of various forms of
labor and domestic unrest.

Even though the proportional role of oil and natural gas in
the state budget has indeed declined to as low as 21.50 percent
of total internal revenue, we should not underestimate the impact
of the international oil market. As Soedradjad rightly observed,
our concern over a drop in oil prices is not linked to their
impact on government revenue but on the psychological impact it
would have on business confidence and the people's expectations
about the economic future.

Though the possibility of the oil prices declining below $16
-- the average price used for oil and gas receipt projection for
the current fiscal year -- is quite remote, we must still take
precautions to provide for such a development. This is especially
important because of the severe constraints we are encountering
within the balance of payments due to the heavy foreign debt
service burdens.

We have no intention sounding the alarm about the impact of a
depressed oil market. But the possible psychological impact, as
hinted by Soedradjad, might have far-reaching repercussions upon
the monetary stability. Past experience shows that sharp oil
price declines always sets off currency speculation and, given
Indonesia's open capital account system (free foreign exchange
regime), such development might cause monetary instability.

The second variable mentioned by Soedradjad, the volatile yen,
is also out of our hands. However, this factor also may strongly
influence our economic situation because more than 40 percent of
our $83.3 billion in foreign debts are denominated in the
Japanese currency, while the prices of our oil and natural gas
are set in the American dollar.

We take Soedradjad's caution about the dangers of excessive
expansion in imports as a warning against the implementation of
many big projects which have a long gestation period. There
seems to be a misunderstanding regarding big projects: Many
businessmen assume that since they are private ventures their big
imports do not in any way affect the macro-economic situation.
They apparently do not realize that their big imports also put
severe pressures on the overall balance of payments. Hopefully,
the ministerial team in charge of overseeing foreign commercial
borrowing by the public and private sector continue to tightly
manage new debts.

Though the trends so far do not give us anything to be alarmed
about, Soedradjad's note of caution still serves as a much-needed
reminder both to the government and private sector on the safe
way to manage the economy. The old adage still rings true, that
an ounce of prevention is worth a pound of cure; adequate
precautionary measures will prepare Indonesia to contain the
damage from any adverse developments caused by uncontrollable,
external factors.