Election buoys the market

Election buoys the market

The financial market predictably reacted quite positively to
the peaceful and orderly presidential runoff, especially because
the election was perceived to be fair. While the rupiah remained
stagnant at 9,035, the stock market increased by 1 percent on
Tuesday with the Jakarta stock price index closing at 824.

This market sentiment will most likely strengthen on the back
of strong political stability, especially if both the president
elect and the losing candidate demonstrate a high degree of
statesmanship in facilitating the transition process. The
immediate impact of this upbeat market sentiment will be a higher
pace of portfolio capital inflows, which will fuel a higher rate
of rupiah appreciation and substantial rise in stock prices.

These developments will in turn strengthen the virtuous circle
within the economy. A stronger rupiah will decrease the costs of
imports and consequently reduce inflationary pressures, thereby
enabling the central bank to decrease its interest rates. An
eased money policy will help commercial banks to cut their credit
interest rates, and more businesses will be able to afford new
loans to expand operations. Even more substantial will be the
significant decrease in the government's domestic debt-servicing
burdens, thereby releasing bigger resources for other more vital
spending such as on public services and infrastructure.

The new president hardly has any time for celebration as the
new government is immediately in for big challenges. First of
all,the incoming government and the House of Representatives will
face a very tight schedule to deliberate the 2005 state budget
plan. This central government budget plan has to be approved by
the House in November at the latest to allow for at least one
month for local administrations to prepare their own budgets.

The government-House deliberation of the 2005 state budget
plan will be quite tough as it will have to encompass painful
measures to ensure fiscal sustainability. Foremost among them
will be raising domestic fuel prices to cut down on fuel
subsidies, which this year alone is estimated to balloon to about
Rp 63 trillion ($7 billion) from the original plan of Rp 14
trillion due to the steep rise in international oil prices.

Preparing conducive political and economic preconditions for
the new fuel pricing policy will be one of the most challenging
and even delicate tasks for the new government. Managing the
economic impact and political repercussions of higher fuel prices
is never easy. In fact it was higher fuel prices that accelerated
the downfall of then president Soeharto in May, 1998.

The new government has to bite the bullet because further
deferring this painful measure would erode market confidence in
the fiscal management and, yet more damaging, would damage the
credibility of the government in continuing economic reform.

Political determination to continue the fiscal consolidation
is central in the ongoing process of economic reform and is one
of the bedrocks of the current macroeconomic stability. Hence,
the 2005 budget plan should convey to the general public, notably
the market, a strong, clear-cut message regarding the new
government's fiscal policy as it will help the central bank
design an appropriate monetary management to control inflationary
pressures.

Better coordination of monetary and fiscal policies, as
reflected in the steady easing of the credit crunch and the
continued fiscal consolidation over the past two years, is vital
to maintain macroeconomic stability, without which almost nothing
else will work within the economy.

In this context, it is therefore imperative that the House and
the government give top priority to the deliberation of the draft
2005 state budget, that was proposed in mid-August by the present
government.