Drama of RI's economic crisis

Drama of RI's economic crisis

This is the second of two articles excerpted from a paper
presented by former finance minister (April, 1993- March, 1998)
Mar'ie Muhammad' at the Asia Research Center of Murdoch
University in Perth, Western Australia, on Aug. 20, 1998.

PERTH, Australia: Many circles believe a managed currency
floating rate system accompanied by a very wide intervention band
is more appropriate for developing economies, including those of
Southeast Asia.

Many informed circles argue that developing economies are not
ready to pursue a policy of floating exchange rates.

As an overview, several lessons can be drawn from the crisis
in Southeast Asia.

* The crises in Thailand, Indonesia and South Korea were
triggered and worsened by fragility in the financial sector and
huge private borrowing.

* A sound fundamental macroeconomy is of critical importance
but not a guarantee against a currency crisis. However, it can
mitigate the contagion effect. Furthermore, economic fundamentals
at the corporate level have now become more important since the
private sector is the true market player.

* Confidence building forms the core of the issue, which is
not just a matter of economics.

* To restore confidence, countries need to begin at home,
although support from international communities is highly
important.

* The spillover effect is in reality a reflection of a
globalized market, at least in terms of its regional scope.

* Although the respective roles of governments and
international institutions are important, the role and strength
of market forces, including speculators, are more dominant.

* Sound policies that result in attracting capital inflows are
absolutely essential and should be rewarded more richly than
previously. Conversely, bad policies that encourage capital
outflows should be more severely punished.

* Greater transparency is essential. Full disclosure allows
investors to assess risks appropriately at the macro and micro
levels, and will enhance confidence in the market.

* Economic and other programs for reform aimed at addressing
this issue should be comprehensive and bold enough to convince
the market, and should be implemented in a consistent manner.

* The chain reaction of nervous investors and fund managers
sends a bad signal to the market. This unpleasant and worrisome
condition is exacerbated by offshore creditors who hasten to
liquidate their short-term loans to domestic borrowers. The
market becomes increasingly dried-up since the rational
expectation of society is for the U.S. dollar to become even
stronger.

In addressing the crisis, the Indonesian government is
committed with the International Monetary Fund to achieving the
strategy outlined below.

* Stabilizing the rupiah at a level more in line with the
underlying strengths of the Indonesian economy, including through
a tightened monetary policy.

* Strengthening and accelerating a strategy for the
restructuring of the banking system.

* Strengthening the implementation of the structural reforms
that will create the foundation for a more efficient and
competitive economy.

* Providing a framework for comprehensively addressing the
debt problems of private corporations.

* Restoring trade financing to a normal basis, thereby
allowing domestic production and especially the export sector to
recover.

In summary, some observations can be highlighted.

* Indonesia remains in the international spotlight as it
struggles to come to grips with the adverse fallout from a deep
and multidimensional banking, currency and debt crisis, while
simultaneously attempting to effect fundamental transformation of
its political, economic and social institutions.

Short-term fire-fighting measures have been taken,
particularly in efforts to improve the availability and supply of
basic necessities for the hugely increased numbers of poor, and a
start has been made on a wide range of urgently needed structural
adjustments which can be expected to have a longer-term effect.

Undoubtedly, however, the most pressing requirement for a
solution to Indonesia's many challenges lies in the restoring of
confidence, starting at home and extending overseas.

* Restoring confidence depends, in part, on the
acknowledgement and correction of past wrongs. While a number of
recent actions -- such as the continued release of political
prisoners, the ongoing independent inquiry into the May 1998
riots and the high-level army investigation into the kidnappings
of political prisoners -- have yet to run their full course and
all have their dark sides, they nevertheless also reflect
important examples of responses to a society now demanding
greater truth, honesty, transparency and justice.

* Equally significant have been the initial responses from the
central government to regional aspirations, evidenced in the
measure announced by Armed Forces for the cessation of military
operations in Aceh, the withdrawal of troops from East Timor and
the fresh momentum in negotiations between Indonesia and Portugal
on the future of East Timor, beginning with special autonomy
status for the province.

* Particularly significant have been the recent, further
pledges of multilateral financial aid through the IMF and the
Consultative Group on Indonesia (CGI), together with bilateral
aid packages committed to by a number of countries. There has
also been the agreement on the rescheduling of principal
repayment of the government's debt to bilateral creditors, all of
which are vitally important to helping cover the urgently needed
social "safety net" being constructed by Indonesia, and support
more fundamental economic restructuring.

The enhanced aid can be said to reflect, among others,
recognition of the depth of Indonesia's problems and, indeed,
heightened sympathy for the severe plight of Indonesia's growing
numbers of poor, as well as confidence in Indonesia's ability to
find a way out of its crisis.

* While the overhang of unhedged corporate foreign debt
continues to weigh heavily on many Indonesian firms, one way
forward has been provided in the establishment in July of the
Indonesia Debt Restructuring Agency (INDRA), which provides a
framework for voluntary agreements between overseas creditors and
Indonesian corporate debtors to reschedule debt over a period of
up to eight years.

Under the scheme, INDRA will act as an intermediary between
participating debtors and creditors, receiving payments in rupiah
from Indonesian debtors and making payments to debtors in foreign
exchange. Confidence on the part of foreign creditors may also
have been enhanced with the introduction of the new bankruptcy
regulation which took effect Aug. 20.

* Quite separately, a further very practical measure to help
restore business confidence, especially at home, is to be seen in
the important new initiative of the government to assist firms,
primarily small traders and retailers, whose businesses were
destroyed in the May riots.

* The massive fall in the rupiah measured against the U.S.
dollar, which has been a major factor in the plight of many
Indonesian enterprises, has been far from bad news for all
sectors. On the contrary, businesses focused on low-cost
indigenous resources and not reliant on high-priced imported
materials have been able to take advantage of the rupiah's
depreciation for their exports.

* Resource-based activities, along with services, also add a
bright note to what might otherwise be seen as somewhat
depressing news in terms of new foreign investment approvals.

In the six months through June 1998, the cumulative number of
approved foreign projects was up by 27 percent, but their
proposed investment value was down by 45 percent compared with
the corresponding period for 1997.

The problem lies in manufacturing, with virtually all sectors
showing a decline. In contrast, virtually all primary activities,
from basic food crops to mining, showed increases over the
previous year.