Businesses need clear direction

JAKARTA (JP): Analysts and businesspeople are again urging the government to be firmly united in coping with the present financial crisis and to refrain from giving conflicting signals that could worsen the current uncertainty gripping businesses.

They said it has become imperative for the whole cabinet, not only the monetary authorities, to work together to cope with the crisis.

"We are still waiting for a clear-cut guideline from the government as to where we are being led. We have instead been given conflicting and, sometimes confusing, signals," said chairman of the Gemala Group, Sofyan Wanandi.

Sofyan said a clear direction was more crucial than ever because businesses and the central bank have yet to learn to live with the new market reality of floating rupiah.

"We have been living comfortably with a fairly stable rupiah for over 10 years. And suddenly we find ourselves in a volatile currency market," Sofyan told Indonesian and Australian businesspeople at a breakfast meeting yesterday.

Economist Anwar Nasution from the University of Indonesia's School of Economics also stressed the importance of consistent policy signals to create sustainable macroeconomic management.

"The government may not realize it, but what we are facing now is a painful combination of currency and banking crisis," Anwar told the meeting, hosted by the Indonesia-Australia Business Council (IABC).

Analyst Sjahrir agreed, saying the "financial crisis we are encountering warrants overall policy reform in the fiscal, monetary and real sectors".

"The punitively high interest rates applied to stabilize the rupiah is doomed to fail if this move is not supported by reform measures to address the structural weakness of our real sector," Sjahrir said.

"And we are worried because what we have got so far from the government is conflicting signals from individual ministers," added Sjahrir.

"We are confused because one minister said this while another one stated different things," Anwar added.

Sjahrir, chairman of the Institute for Economic Studies, Research and Development -- the Indonesian Chamber of Commerce and Industry's (Kadin) think tank, briefed reporters yesterday on the impact of the currency crisis.

Sjahrir shared Sofyan's view that the skyrocketing rise of the central bank's certificate rate (similar to the U.S. Fed fund rate) to as high as 30 percent last week was a wrong price signal.

Damage

"This credit crunch is so punitive that it is now destroying the normal market mechanism. If these punitive high interest rates are maintained much longer, they will eventually damage our economic fundamentals," Sjahrir warned.

Both Sofyan and Sjahrir foresaw the economic growth this year to slow down to less than 5 percent from 7.98 percent last year.

"Growth at this level, though taken as fairly high in many other countries, would be painful for a large developing nation like Indonesia with a huge labor force," Sjahrir noted.

Sjahrir also expressed concern over foreign debt burdens of the private sector which he estimated at more than $65 billion.

"About $34.3 billion of the total is to mature this year. More worrisome is that about 30 percent of these short-term borrowings have not been hedged against exchange rate fluctuations," he added.

"You can imagine the damage all this would do to the business sector, especially after the market value of the companies listed on the Jakarta Stock Exchange has declined by about 25 percent in just one month due to the impact of high interest rates," Sjahrir said.

Sofyan concurred that people now prefer to put money in bank deposits rather than in business ventures because sensible businesses cannot operate with funds that cost between 40 percent and 50 percent a year.

"When the central bank offers 30 percent interest on one-month papers, commercial banks have to offer much higher rates to attract deposits and consequently lend at prohibited rates," Sofyan said.

He said the business community realized the money squeeze was simply a temporary measure to stop speculative attacks on the rupiah.

"But we want to know when this crisis will end. How long will we suffer from this pain?" Sofyan asked.

Anwar and Sjahrir believe the credit crunch alone is not sufficient to lead the rupiah to a sustainable market rate. It should be coupled with concerted efforts to address structural weaknesses.

"The haphazard manner in which the central bank has been tackling problem banks has not helped improve market sentiments on the rupiah," Anwar added.

Sjahrir agreed that the economic fundamentals, which are fairly sound, are not the most influential factors which form market expectations of the rupiah.

"Other factors such as the lack of good governance have become the underlying concern among businesspeople, including currency traders," he said.

He is convinced the rupiah will eventually settle at a sustainable market rate under reasonable interest rates if market distortions such as monopolies are removed from basic commodities trading.

"I hope the present situation will revive the momentum for long-delayed broader and deeper reform measures," Sjahrir said. (vin)