BI's prognosis

BI's prognosis

Indonesia's economic outlook for this year, as charted out by
Bank Indonesia's board of governors in its report on Tuesday,
fundamentally is not much different from that of 2001.

Inflation will likely remain at a double-digit level due
largely to the increases in fuel prices and electricity and
telecommunications rates and the persistently weak rupiah. Export
and private consumption growth may slacken or will at best hover
at last year's level. Private-sector investment will continue to
be sluggish, inadequate to provide pump priming in the absence of
fiscal stimulus.

No wonder the economic growth in terms of gross domestic
product this year is predicted to remain flat at last year's
estimated 3.4 percent, or at best expand by 4 percent. This
growth rate is certainly far from sufficient to generate
employment even just for first-time job seekers entering the
market every year, let alone the tens of millions already in the
unemployment ranks.

The question, though, is why this year's economic prospects
should be necessarily as grim as last year's. True, the economy
has been deprived of its external locomotive due to the global
economic recession, and even if the American economy begins to
pick up in the second half there will be a time lag of a few
months before it affects the Indonesian economy.

But the political climate is now much more stable, unlike last
year when then president Abdurrahman Wahid virtually stopped
leading the nation and the government during the first half when
he became preoccupied with his fight against the House of
Representatives.

We think political stability will more than offset the
negative impact of the depressed global economic condition on our
economic recovery process.

First of all, President Megawati Soekarnoputri's government is
supposed to be able to focus its attention and resources on the
reform programs to fuel a stronger economic recovery.

The rupiah, which depreciated by more than 17.5 percent last
year due mainly to the political turbulence, is expected to be
much more stable this year, thereby cutting inflationary
pressures from imports and providing businesspeople with a more
predictable monetary condition to make reasonable cost and risk
calculations.

A condition that allows for more reasonable risk calculation
is quite conducive for banks to expand lending. This is
contrastingly different from last year when the political fiasco
made business risk so high that banks only disbursed Rp 47.7
trillion, or a mere 39 percent, of the Rp 122 trillion in new
loans they had approved.

A higher pace of lending will generate a virtuous circle in
that banks, which now depend on the interests of government bonds
for over 45 percent of their revenues, will be able to raise more
income. Further down the line, economic activities will increase
as more fuel flows from the banking system.

Credit expansion can further be accelerated if the
restructuring of corporate debts by the Indonesian Bank
Restructuring Agency (IBRA) can be sped up. This will create
another virtuous circle because owners of restructured debts will
regain access to working capital loans and will consequently be
able to raise their production or operating rates.

Another economic accelerator will be fired up if asset sales
and privatization can be sped up. It is worth remembering that
the disposal of depressed assets at IBRA and the sale of good-
performing state companies is imperative not so much to raise
revenues for the state budget but more to woo capital inflows.

It is extremely difficult now to attract investments to
greenfield projects as most manufacturers still suffer from large
excess capacity. Hence, capital inflows would be most promising
through asset acquisition. Asset sales would not only prevent the
asset quality from deteriorating. Certainly, new investors would
improve the management of the companies and plow in additional
investment to increase their competitive edge.

There are, of course, the risks of social unrest and even
political turbulence related to the dispute over the new minimum
wages and the painful measures to raise fuel prices and
telecommunications and electricity rates as part of the ongoing
reforms to put the economy on a stronger footing. Poor management
of these policies would not only worsen the economic prospects
this year, but also might undo some of the achievements already
made through past reform measures.