Confidence crisis not yet over despite aid: Expert

JAKARTA (JP): The turmoil that continues to hit the rupiah and the local stock market indicates that confidence has yet to return to the country's economy despite an International Monetary Fund bailout, an economist has said.

The executive director of the Center for Strategic and International Studies, Mari Elka Pangestu, said yesterday the global economic downturn and domestic uncertainty had slowed down efforts to strengthen both the rupiah and the stock market.

"We are experiencing the contagious effect of the region's jitters," she said.

She said in Japan, the market was nervous about the possible closure of the country's securities companies.

People wondered whether China would adjust its currency to compete with the lowered value of other currencies in the region, and whether the currencies of India and Brazil would be hit by the domino effect of the downfall of Southeast Asian currencies, she said.

Speculative attacks, triggered by the devaluation of the Thai baht, had led to about a 35 percent drop of the rupiah against the U.S. dollar.

The currency crisis also hit other countries in the region, dragging down the values of the Malaysian ringgit, the Filipino peso and even the usually robust Singaporean dollar.

Last week, the Jakarta Stock Exchange composite index hit a four-year low, breaking through the psychological 400-point barrier, upon the central bank's announcement of the country's foreign loans. The index has since sluggishly picked up.

Mari said internal factors also greatly affected the low confidence in the country's economy.

Foreign and local investors were still waiting for the full implementation of the government reform package established early this month as a concession for the IMF-led financial package.

The market was also fazed by the uncertainties regarding the private sector's short-term loans that were going to mature soon, she said.

The private sector was wondering whether the government would help bail out the companies with the maturing loans, and whether the loans would create more problems, she said.

Both the government and the private sector must take an approach to reduce this uncertainty, she said.

Mari said the IMF package, containing standby loans of about $23 billion, did not necessarily help in solving the problems.

"The IMF cannot 100 percent guarantee that we will get out of this shackle. We will have to wait until the implementation of the reforms takes effect on our economy," she said.

Unless the uncertainty was reduced, the country would not be able to improve its weaknesses and avoid similar crises in the future, she said.

Mari predicted the crisis would likely be over after several more months.

However, the crisis would be followed by an after-shock in the forms of an economic recession and stagflation as the result of the financial turmoil in the next one to three years, she said.

Japan still suffered from lower growth and a recession since the early 1990s when its economy bubbled, while Mexico has finally begun to recover after two years, she said.

In an optimistic scenario, Mari said the economy might recover by the end of next year or the beginning of 1999, if supported by the return of foreign investors and good governmental measures.

After the recovery, the government must set a mid-term and long-term strategy to prevent similar crises from occurring again.

This would show people and investors that Indonesia was serious about its economic vision, she said.

The mid-term reforms would focus on how to boost non-oil and gas exports, and improve human resources and infrastructure, she added.

Mari said the crisis was also a wake up call for large companies and conglomerates to be less diverse in the future.

Many companies expanded too rapidly and took out too many loans, resulting in a desperate situation now.

These companies must instead focus on their core business to increase their exports, she said. (das)