Bigger threats to growth

Bigger threats to growth

Bank Indonesia's first quarterly report for this year
confirmed what most private-sector analysts have predicted, but
something the government refused to fully acknowledge at least in
its pronouncements.

The pace of economic growth, the report said, slackened to 3.2
percent from 3.8 percent in the same period last year due largely
to a weakening consumer demand. This validated the finding of the
Danareksa Research Institute survey that consumer confidence in
February fell to a historic low as people became more pessimistic
about the government's ability to spur higher growth.

Yet more ominous is the central bank's warning of several
factors, which, if not well managed, could further depress the
growth rate even to less than the 3.6 percent expansion achieved
last year.

This means the first quarter expansion, though already slower,
has not yet reflected the impact of the war in Iraq, the
uncertainty which has prompted most businesspeople to put on hold
investment plans and the higher security risks that have
increased the costs of doing business.

Hence, even though the macroeconomic conditions remains by and
large stable, with the rupiah continuing its slight appreciation
against the American dollar, inflation fully under control and
the central bank's benchmark short-term interest rate down to
11.4 percent, the developments ahead are full of high risks.

Adding to the risk of a worse economic outlook for this year
is the epidemic Severe Acute Respiratory Syndrome (SARS) that was
not factored in the central bank's quarterly analysis.

Fears of SARS infection have led to cancellations of business
and leisure trips, conferences, trade shows and numerous other
public events, further weakening private consumption.

Short-term assessments of the impact of SARS still focus on
the harm likely to be inflicted on the industries most directly
affected such as businesses associated with tourism, retail
outlets and restaurants. But as local companies in China, Hong
Kong, Taiwan, Singapore and other affected countries adopt a
siege mentality and the basic operations of businesses are
stymied by fear and an unwillingness to move about, many worry
that the pain could send ripples throughout the region's economy.

In view of the interdependence of national economies, ripples
of the epidemic are wreaking havoc not only in Asia but are
reaching almost across the world. No wonder, some economists see
SARS as the gravest economic threat to Asia since the financial
crisis that tore through much of the region in late 1997.

The Indonesian economy could be affected immediately by way of
trade, given the country's expanding economic ties with China,
Hong Kong, Singapore and Taiwan. For example, Indonesian
manufacturing companies may find it much more difficult now to
procure basic materials, parts or components from suppliers in
those countries.

The compounding impact of the uncertainties caused by the war
in Iraq and the SARS epidemic now makes it more difficult for the
government to maintain macroeconomic stability, let alone to
promote exports and stimulate a higher pace of investment to
offset the decline in private consumption, which has thus far
been the main locomotive of the economy.

The two external factors -- war in Iraq and SARS -- that are
affecting the national economy are beyond the government's
ability to control. But it can help contain the potential damage
by taking more concerted efforts to remove the host of domestic
problems, which have been eroding the competitiveness of local
businesses.

The government has been fully aware of bureaucratic and
regulatory barriers, weak law enforcement and overly rigid labor
regulations that have been stifling the business sector. What is
urgent and imperative now is a stronger determination and better
coordination on the part of all branches of the government to
address those problems.

Without significant progress in these structural reforms, the
business sector will remain highly risky and an inimical business
environment is a threat to the banking industry, which is still
in the early stage of operational restructuring after its massive
recapitalization.

Just witness how bank corporate loan expansion has remained
very slow even though most banks are now awash in excess
liquidity. The interest rate on working capital loans stays as
high as 18.5 percent and investment credits in excess of 17.8
percent despite the steady decline in the central bank's interest
rates.

Even though the government now controls all the largest banks,
it cannot simply instruct them to expand their lending. The most
effective way of stimulating credit expansion is by decreasing
the domestic risk factors to allow for reasonable calculation of
business risks.

But banks will remain averse to credit expansion if the
business condition is unusually risky because an inimical
business climate heightens the risk of business failure and,
consequently, the risk of bad loans.