Economy will continue to contract this year: CSIS
Economy will continue to contract this year: CSIS
JAKARTA (JP): Indonesia's economy will continue to shrink this
year, primarily because of incertitude over the bank
restructuring program and the settlement of the huge corporate
foreign debt overhang, the Centre for Strategic and International
Studies (CSIS) has predicted.
CSIS economist Hadi Soesastro said on Friday that the economy
might bottom out in 2000, but only if the June general election
was not chaotic.
"The economy will continue to shrink this year," he said.
He noted that the economy should book a contraction of 10
percent in the first quarter of this year before improving in the
second quarter. The economy would shrink by a range 4 percent to
5 percent for the whole year.
Hadi's prediction contradicts government projections that the
economy will book zero growth this year.
Indonesia suffered an economic contraction of 13.68 percent in
1998, sending unemployment to 15.4 million and slashing per-
capita income to US$400 from $1,055 in 1997.
Nearly half the country's more than 210 million population
are believed to live below the poverty line.
Hadi foresaw that unemployment would increase and more people
would fall into the poverty trap.
He said the current economic crisis -- the country's worst in
three decades -- would prove costly for Indonesia.
Hadi emphasized that even in the most optimistic scenario --
in which the economy would return to a pre-crisis growth rate of
7 percent by 2007 -- the gross domestic product (GDP) would only
be Rp 400 trillion (US$45 billion), based on the 1993 constant
price.
"If there wasn't a crisis, the GDP would be Rp 800 trillion.
So the cost of the crisis is Rp 400 trillion which is equivalent
to the size of the 1993 economy," he said.
"This is a very expensive price to pay. (This figure) should
jolt us into the sense of urgency required to solve the crisis."
Another CSIS economist, Pande Raja Silalahi, said that if the
country failed to proceed successfully with its bank
restructuring program and private sector overseas debt
settlement, the price of the economic crisis could be even
greater.
"We could lose a decade's (worth of growth)," he said.
He lambasted the government's decision to delay the scheduled
bank closures, causing confidence in the bank restructuring
program to plummet.
"It was the worst option the government could take," he said.
He said the delay had caused depositors to transfer their
money from domestic banks to foreign banks.
The government earlier announced that it would close down some
40 banks on Feb. 27 but the plan was postponed at the eleventh
hour for at least two weeks.
Bank liquidations are part of the overall bank restructuring
program, which will cost at least Rp 300 trillion in
recapitalization funding.
Pande also said that the prospect of debt restructuring
between local debtors and foreign creditors remained dim.
He urged creditors to provide debtors with significant debt
reductions to solve the debt hangover.
"There's no way debtors can fully pay their debts," he said.
Most local indebted firms have stalled their debt servicing of
both principal and interest, following the sharp depreciation of
the rupiah.
The Indonesian private sector has a total overseas debt of
more than $80 billion. Restructuring this debt is critical for
the return of foreign investment.
Separately, deputy chairman of the Lippo Group James T. Riady,
said in Seoul on Thursday, that the bank and corporate overseas
debt restructuring programs were only emergency measures to solve
the economic crisis.
Implementing good corporate governance with prudential vision,
was more fundamental for long-term stability and would help to
prevent a similar crisis, he said.
"The lack of prudential vision in the past was related to weak
government supervision and incomplete regulations," he told
leading businessmen and government officials at a conference held
by the Organization for Economic Cooperation and Development.
(rei)