Sat, 06 Mar 1999

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)