Businesses need clear direction

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)