Business community nervous about change in leadership
Business community nervous about change in leadership
The death of four students on Tuesday ignited riots and heightened social and political tension. Economist Sri Mulyani Indrawati, vice chairwoman of the University of Indonesia's Center for Social and Economic Studies, discusses the impact of this on the economy.
Question: What impact will the political tension have on the Indonesian economy?
Mulyani: The student killing which was watched by domestic and international television audiences have created an extraordinary image of Indonesia which will seriously damage its economy.
A majority of the international business community will be led to believe that their Indonesian partners cannot operate normally and will cancel orders. That will result in a decline in exports.
Foreign investors will shun Indonesia. State Minister for the Empowerment of State Enterprises Tanri Abeng, for example, has announced that at least two of eight foreign investors have shelved plans to acquire stakes in 12 state-owned firms under a privatization program.
Indonesia is facing difficulties carrying out international trade which is acting in much the same way as a boycott.
Economic measures, including the International Monetary Fund (IMF)-sponsored reform program, will not yield results, even though until recently they had begun to show promising signs. Bank Indonesia's huge spending to honor interest payments on SBIs (promissory notes), and the high cost of banking credits for companies, for example, will yield only small benefits.
Q: Do you think that political tension will interfere with disbursement of the next installment of IMF aid to Indonesia?
M: Surely it will. At least, the IMF will need time to see whether the funds can have any positive impact. They will consider disbursing money to be useless if, for instance, it does not have the potential to improve foreign investor confidence. Of course, it will be very difficult for the IMF and other donors such as the Organization for Economic and Cooperation Development (OECD) and the Group of Seven (G-7) industrial nations to take a decision on aid because they know that without support in overcoming economic problems, the Indonesian government will face even more difficulty establishing political stability.
Q: Will negotiations on debt rescheduling between Indonesian debtors and their foreign creditors be affected too?
M: Political uncertainty will force foreign creditors to impose unfavorable terms on Indonesian debtors when the two sides meet again in Germany.
Q: What about the government's 1998/1999 budget?
M: The budget will be jeopardized because government revenue depends heavily on two sources, oil and foreign aid. We cannot expect much revenue from non-oil taxes because many companies have stopped production due to the current difficulties.
Regarding expenditure, the government's plan to reduce subsidies and to streamline activities will be affected by political tension. Unrest will put pressure on the government to spend excessively on sectors needed to support the operation of a shaky government. That means the government will be forced to run a budget deficit in 1998/1999.
The lack of central government funds will badly affect a number of local administrations, such as those in Bengkulu, East Nusa Tenggara and Maluku, which are between 80 percent and 90 percent dependent on the central government for finance.
Q: Considering these conditions, what do you see happening in the economy this year?
M: It will be the worst year during the era of the New Order government. It will have been a success if we can reign in economic growth to between minus 7 percent and minus 8 percent, with inflation running at 70 percent. However, an inflation rate of 100 percent is likely if current political tension persists because price rises are not only caused by cost-push factors, disruption of production activities also plays an important role.
Q: If Soeharto felt he had lost the trust of his people and stepped down, what reaction would you expect in the economy?
M: It would raise hopes and enthusiasm for a rapid leadership succession, but would receive a mixed reaction from the business community, which would fear uncertainty during the transition.
If a leadership change does take place, they will wonder who will then lead the country, what political objectives will be set, and whether the country is capable of managing the leadership transition in an efficient and competent manner. Investors will wait for the return of normal political conditions before resuming business activity in Indonesia. During the first six months of the new leadership, citizens may face problems in meeting their daily needs.
Whoever takes over the leadership will have a difficult situation on his or her hands right from the very start. (riz)