Bullish market sentiment
The virtuous circle of strong macroeconomic stability has continued to maintain bullish market sentiment in Indonesia's economy in the first week of the new year, as evidenced by the strengthening rupiah and the impressive rise in the Jakarta stock exchange Composite Index, to reach its highest level in the last 6.5 years.
Though the stock market does not always fully reflect developments in the economic fundamentals but is rather the result of interplay in market expectations and perceptions, the upbeat sentiment will nevertheless help bolster confidence in the economic outlook during this election year.
We are confident that, barring major social or political violence or security disturbances, the economy will be able to weather the politically turbulent period ahead and end the election year with growth of almost 5 percent, up significantly from an estimated 4 percent last year.
We are even more optimistic about achieving a smooth economic passage through the three rounds of elections within the next nine months, after President Megawati Soekarnoputri's Cabinet announced the top priorities for its economic agenda on Monday.
Chief economics minister Dorodjatun Kuntjoro-Jakti said, after the first Cabinet session this year, that the government would focus its attention on bolstering economic growth, maintaining the pace of reform measures, attacking poverty, facilitating the smoother distribution of goods and preparing the draft 2005 state budget for the new government to be installed later in October.
The priority economic programs seem to be the right set of policies the market requires to maintain its confidence in the country's economic outlook, even during the upcoming transition to a new government, because they have nothing to do with a short-term desire of the incumbent government to gain more votes.
Higher economic growth is badly needed to reduce poverty, by absorbing the huge number of unemployed people and the estimated 2.5 million job seekers who enter the labor market annually. But accelerating the economic expansion requires another locomotive to support private consumption (domestic market demand), which has thus far been the main growth engine.
Since private investment is unlikely to play a significant role this year, given the wait-and-see attitude among businesspeople, an additional stimulus should be sought from external market demand. Fortunately, the world's economic powerhouses, the United States, Japan and the European Union, are all predicted to grow more strongly this year.
But the government fully realizes that Indonesia cannot take great benefit from the stronger international economy if its exports are not highly competitive. In this regard we are encouraged to learn that President Megawati will bolster the operations of the Export and Investment Promotion Team.
Hopefully, this means that the team, which is headed by the President and includes all the coordinating ministers and other members of the Cabinet directly or indirectly responsible for the promotion of exports and investment, will emphasize policy coordination and action to remove major barriers to industrial operations and to facilitate smoother trade.
It is this powerful team that is also primarily responsible for executing the other priority programs -- keeping up the pace of reforms, facilitating smoother distribution of goods and preparing the draft 2005 state budget for the new government.
Even though Dorodjatun did not specifically mention anything about budget discipline, we strongly believe that the government also fully realizes the importance of maintaining fiscal discipline, especially in this election year when political parties will sharply increase their campaign expenditure.
Excessive spending outside budget guidelines, as set in the 2004 state budget, would increase inflationary pressures and force the central bank to raise its benchmark, short-term interest rate to soak up excess liquidity.
This monetary tightening would affect the stock market, hurt businesses and erode their market competitiveness as they find themselves having to pay higher interest charges for their working capital loans. Consequently, Indonesia would not be able to tap external market demand for accelerating its economic growth.
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