Bullish market sentiment

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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