The World Bank’s last quarterly report on Indonesia issued two months ago was entitled Clearing Skies.
True, with an estimated economic growth of 4.3 percent, the highest in Asia after China and India, and the peaceful parliamentary and presidential elections in April and July that reinstalled President Susilo Bambang Yudhoyono for the second term, the economy should be poised for a sturdy take off next year to a growth of as high as 5.5 percent.
With deflation of 0.03 percent in November that put the rise in the consumer price index at less than 3 percent for the whole calendar year, Bank Indonesia will have broader leeway for easing its money policy to encourage banks to expand their credit programs.
But unfortunately, the outlook is no longer as rosy as it should have been. Clouds are instead gathering over the economy, and the combined domestic and external shocks could prove very destabilizing for the financial market.
While the dust of the battle that pitted the police and the Attorney General’s Office (AGO) against the corruption busters (KPK) have barely settled down, the government is now confronted with a more politically and economically damaging controversy over the November 2008 bailout of Bank Century (now Bank Mutiara).
What is now notoriously called the Bank Century scandal would most likely have more adverse repercussions on the economy because Vice President Boediono (who was the central bank’s governor during the bank rescue) and Finance Minister Sri Mulyani Indrawati are at the centre of the fray.
As the House of Representatives has voted to exercise its right of inquiry into the scandal, the issue has now entered practical politics, which according to American politician Henry Adams, consists in ignoring facts.
One can imagine the virtually endless string of parliamentary summonses that both Sri Mulyani and Boediono as well as senior officials at the finance ministry and Bank Indonesia will have to fulfill in light of the investigations, not to mention the wave of rowdy street demonstrations. What an energy-sapping debacle.
The fractions within the parliament as a result of the bank debacle also reveal the weakness of the coalition government. This problem could stall the pace of reforms and decision and policy making within the government.
The problem is that despite resilience in the overall economy and improving business environment, investors have remained cautious, as can be seen in the slow pace of purchases of capital equipment, except in property development. New lending remains restrained even though the central bank has cut down its benchmark interest rate to as low as 6.5 percent.
While nonresident investors have returned as net purchasers of financial assets, overall the capital account switched to deficit, largely due to slower net foreign direct investment. The rupiah did appreciate significantly due to the high capital inflows, which increased the central bank’s foreign reserve holding to US$64.50 billion as of early last month, and the weakening of the American dollar against most other major currencies.
The vulnerability, though, is that the bulk of new capital inflows consisted of portfolio (hot money) capital that could fly out even just at the slightest sign of trouble.
A protracted inquiry of the bank debacle and too much political noise caused by the process could rattle first the financial market and then the rupiah stability with adverse impact on the banking industry.
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