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.