Calm election 'restores faith of investors'
JAKARTA (JP): Coordinating Minister for Economy, Finance and Industry Ginandjar Kartasasmita said on Tuesday that Monday's peaceful general election would provide a strong basis for the revival of confidence in the country's battered economy.
"I've noticed (investors') reaction is positive towards the election process," he told reporters after a meeting of senior ministers.
He pointed out a surge in the rupiah and the share price rally on local markets reflected an improvement of investors' confidence in the future of the country's economy.
Indonesia's first truly free election since 1955 passed peacefully on Monday with no reports of violence, defying earlier rumors that the polls would be mired by chaos and disruptions.
Foreign observers have been impressed by the election process despite a low turnout in several areas of the troubled Aceh province.
Preliminary results showed the popular Indonesian Democratic Party of Struggle (PDI Perjuangan) leading the ruling Golkar Party.
Many foreign investors have delayed plans to invest in the country to see how the election proceeds despite early signs of improvement in the economy over the past couple of months. Several parts of the country were hit by bloody riots in the run- up to the elections.
Bank Indonesia Governor Sjahril Sabirin said increasing confidence in the economy would provide the central bank to allow a further decline in domestic interest rates without threatening the rupiah.
He expected that the benchmark interest rate of the 1-month central bank SBI promissory note to continue to decline at today's auction (Wednesday).
"The interest rate of the 1-month SBI note can still go down without hurting the rupiah because of increasing confidence," he said.
The interest rate of the 1-month SBI note fell to 24.65 percent during last Wednesday's auction from a previous 26.12 percent.
Sjahril didn't predict the magnitude of the decline in the interest rate.
He said, however, the decline in SBI rates as well as in interest rates of bank time deposits would not immediately be followed by a decline in lending rates.
"The spread between the lending rate and deposit rate will remain wide during the adjustment period," he said, pointing out that the interest rate spread would be higher than 4 percent, which it is during normal times.
But Sjahril added that banks had started lending albeit limitedly.
The domestic interest rate went as high as 70 percent in August 1998 when the economic crisis heightened, sending many companies into near bankruptcy.
Sjahril also said the revived confidence would further strengthen the rupiah to between Rp 7,000 to Rp 7,500 to the U.S. dollar, and projected a year-end level of Rp 6,000. The currency closed at around Rp 7,600 on Tuesday.
State Minister of Investment Marzuki Usman said that the resurrection of investors' confidence encouraged by the smooth election process would easily boost direct foreign investment back to the 1997 level.
"Foreign investments could easily climb back to the 1997 level," he said.
Due to security concerns, direct foreign investment approvals dropped by 90 percent to US$560 million during the first quarter of this year compared to $5.1 billion in the same period last year.
Head of the Central Bureau of Statistics Sugito Suwito said increased confidence in the economy would allow the country to enjoy another positive growth in gross domestic product (GDP) in the second quarter.
"There are signs of GDP to be positive in the second quarter from first quarter's level," he said.
Indonesia registered a 1.34 percent GDP growth in the first quarter this year compared to the fourth quarter of last year. But a year-on-year comparison still showed a contraction of more than 10 percent. The economy shrank by more than 13 percent in 1998.
Sugito said, however, the economy would no longer enjoy a deflation this month as the price of rice had started to increase.
The country posted a negative inflation rate for the third month in a row since March. (rei)