Downside risks in 2004

Downside risks in 2004

The verdict of most analysts is unanimous. Indonesia's economy
will continue to expand next year, but only at a slightly higher
rate than this year's moderate growth, which is estimated at
around 4 percent, due to the extent of downside risks related to
the 2004 elections and the end of the International Monetary Fund
(IMF) program.

Indonesia's economic management will indeed enter a new phase
next year when, for the first time since November, 1997, the
country will implement its reform agenda without the punishment-
and-reward mechanism of the IMF facility.

Fortunately, though, the world's economic powerhouses -- the
United States, Japan and Europe -- are all predicted to post
stronger growth next year and this could create additional
external demand for Indonesian products, provided they remain
competitive on the international market.

It is too early to judge whether the government will have the
political will to maintain the pace of reform in view of the
elections of House of Representatives members in April and the
president and vice president in July.

An electoral period usually creates great temptations for the
incumbent government to focus on its short-term interests of
winning the ballots by introducing populist programs at the
expense of the long-term good of the economy.

The improving macroeconomic stability over the last two years
is seen as a strong foundation with which to weather the
political turbulence and heightened political emotions. But delay
in, let alone backtracking on, reform implementation could erode
market confidence in the government's credibility and
consequently the economic outlook.

The risks of isolated violence due to uncontrolled political
emotions or protracted disputes over the interpretation of
election rules cannot simply be brushed off, as most voters and
even party leaders have yet to accustom themselves to the
electoral rules and procedures, which are largely new.

However, it is of great comfort to know that none of the 24
political parties eligible to take part in the 2004 elections has
any plans to drastically change the basic principles of the
national economy. All are for a market economy based on fair,
open competition with varying modifications and emphasis to
reduce poverty and enhance a more equitable distribution of
income.

One is nevertheless a bit nervous thinking about three rounds
of elections, each with street campaign rallies, within a period
of just five months and involving more than 140 million
registered voters spread across one of the world's largest
archipelagos, with both the most primitive and sophisticated of
transportation and communications modes.

Many also worry about how the economy will fare or who will
manage the economy when the executive and legislative branches of
the government are preoccupied by the election agenda from March
to September.

The government has set for itself an ambitious reform agenda,
as stipulated in its White Paper, for implementation next year.
Obviously, keeping the execution of the whole agenda on track
won't be easy or even rather impossible.

It is therefore imperative for the government to focus its
attention on the reform measures that are most crucial to
enhancing good governance, as this is the most important issue
within the structural reforms that are designed to stimulate
investment, export and employment creation.

Business leader Aburizal Bakrie, chairman of the Indonesian
Chamber of Commerce and Industry, reiterated the importance of
good governance for the economy in his year-end review with the
mass media last week.

He rightly argued that good governance is vital to improve the
investment climate and consequently the overall competitiveness
of the Indonesian economy. It is investment that creates jobs,
which in turn generate wages and purchasing power to fuel market
demand.

However, downside risks are not the only things one may think
of in relation to the upcoming elections.

All agree that a successful election -- meaning the election
is perceived to be fair and the elected government is seen as
credible and strong enough to continue the reform process -- will
be a great boon to the economy as domestic investment will be
reinvigorated and foreign investors will return in droves to
strengthen the virtuous circle of macroeconomic stability.

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