Bracing for lower growth

Many people watching the live broadcasts of significant numbers of Iraqis so determinedly putting up a fight against U.S.-led troops have ruled out a best-case scenario of the immediate collapse of President Saddam Hussein's regime.

There are now stronger reasons to worry that the war might drag on for far longer than had previously been predicted and that its economic and social costs could be much higher, not to mention the damage resulting from uncertainties surrounding the international business community.

Some economists are forecasting that the U.S. federal budget deficit, which was estimated at US$300 billion before the war, but after President George W. Bush's proposed tax cuts, could deepen by $100 billion to $200 billion, and consequently weaken the dollar, making imports costlier.

The combination of reduced business and consumer confidence in the world's largest economy and already weakening economies in Japan and Europe, and the possibility of oil prices skyrocketing in the event of a major disruption of supplies from the Middle East, would be a stifling drag on the global economy.

What would all of this mean for Indonesia? The most likely scenario is another year of slow growth of around 3.5 percent. Even though the country is still a net oil exporter, forget the sizable oil windfall profit the country might gain. Besides, the windfall would not likely be as great as many might estimate: In view of the consequently much greater expenditure on domestic fuels, the ultimate benefits would be made even less meaningful by the damaging impact on our business and consumer confidence, investment and exports.

Even before the war and the uncertainty it is causing, most foreign investors had been shunning the country. Foreign capital, if any, has flowed mostly through the acquisition of distressed assets disposed of by the Indonesian Bank Restructuring Agency (IBRA) and equity shares at state-controlled companies and banks.

Even this trickle could stop altogether, as uncertainty about the duration and the social and economic costs of the war is prompting investors to put on hold their business plans. More devastating would be the impact if the government could not control domestic protest against the war.

Raucous and violent demonstrations or outbursts of misguided nationalistic or religious sentiment would only validate the international perception of the country as a bastion of radical Muslims.

This would adversely affect further asset disposals by IBRA and government divestment programs that are tasked with raising more than Rp 20 trillion ($2.2 billion) to partly plug the budget deficit of almost Rp 35 trillion estimated for this year. Further down the line, fears of a larger budget deficit could prompt the central bank to stop, at least temporarily, the incremental decrease in interest rates that had been ongoing since early last year.

A further decline in exports, due to higher security risks and costlier transportation costs, would hurt businesses and consequently cut deeply into tax receipts from the corporate sector, especially now that consumer demand, thus far the most powerful locomotive in the economy, has begun losing steam.

Optimists, who foresee a quick U.S. military victory in Iraq and an expansive impact on the global economy that will likely be generated by the subsequent, huge spending on Iraq's reconstruction, may consider this analysis overly pessimistic.

But given the fragile condition of our economy, it is much better and safer for the government, as policy maker, to err on the conservative side rather than on a complacently optimistic one. That is because even the slightest deterioration in macroeconomic stability could severely damage the foundations for a sustainable recovery, especially in the face of a politically turbulent period in the run-up to and during the 2004 general election.

It is therefore not an exaggeration to say that the war in Iraq is, in effect, leading the government into a battle of its own, a tough fight to maintain hard-won macroeconomic and political stability.

To manage a battle requires a war room or nerve center to coordinate attacks. In our case, this means an economic crisis management center where the government and private sector constantly interact with each other to monitor and analyze problems and quickly decide on solutions. Speedy decisions and action are the order of the day at a time of crisis.

The current uncertainty makes it even more imperative now for the chief economics minister to transform the Business Solution Center at the industry and trade ministry into an effective crisis management center by strengthening its resources and authority to resolve quickly any impediment to sound economic activity.