Experts say LoI targets reprieve for businesses

Experts say LoI targets reprieve for businesses

JAKARTA (JP): Businesses can expect a recovery in investment
activities following the signing of The International Monetary
Fund's (IMF) Letter of Intent (LoI), experts said on Tuesday.

Bustanul Arifin of the Institute for Development of Economics
and Finance (Indef) said he expected a jump in investments on the
back of economic reform targets under the LoI.

"In the long run we'll see more investment flowing in,"
Bustanul told The Jakarta Post.

He said several points in the recently signed LoI opened the
door for revitalizing the country's dull investment growth.

He said the IMF, in relaxing its base money supply target to
Rp 110.5 trillion (about US$12.31 billion) from Rp 108 trillion,
eased pressure on Bank Indonesia's interest rates.

Bank Indonesia has been raising interest rates to absorb the
money supply, curbing pressure on inflation and the rupiah.

With a current base money supply at over Rp 111 trillion, the
central bank has been reluctant to cut interest rates.

Instead, rates have been steadily rising even after the rupiah
has firmed. From 14 percent early this year, Bank Indonesia's
three month promissory notes could test 18 percent this week.

Given the high rates, it has become difficult for banks to
expand their lending portfolio to businesses.

Lowering the central bank's interest rates is essential to
allow banks to reduce theirs and thus lower the cost of borrowing
for businesses.

"We hope that banks will soon resume its intermediary role in
the economy," Bustanul explained.

Without the banking sector pushing investment, analysts remain
gloomy over Indonesia's economic growth outlook.

The government has said its economic priority is the creation
of more jobs, which is a prerequisite for higher economic growth.

Economist Hadi Soesastro has estimated Indonesia's economy
must grow by 7 percent to absorb a 2.5 percent growth of the
country's work force.

Under the LoI, the government expects the economy, as measured
by its Gross Domestic Product (GDP), to grow between 3 percent
and 3.5 percent.

"For every increase of 1 percent in GDP, the government
provides 400,000 new jobs," Bustanul continued.

Another boost for the real sector is the LoI's demand for
contingency funds worth Rp 3 trillion to help deficit provinces,
he added.

The funds are part of the government's fiscal decentralization
policy to help the budgets of poorer regions.

"The funds will go to regional administrations for spending,
meaning that it will be spent on local economies," Bustanul said.

He said that as the IMF largely dealt with monetary policies,
most of the LoI's impact on businesses would only be felt in the
long term.

He cited as an example structural reforms, such as promoting
good corporate governance and legal certainty, which would take
time to bear fruit.

Turning to the informal sector of the economy, Bustanul said,
the impact of the LoI there would be even less significant.

"It's not the IMF's job to deal with our informal economy, and
the government also focuses more on the formal economy," he said.

Nonetheless, he said, the IMF and the government acknowledged
the importance of the informal sector, which had absorbed much of
the country's work force when the manufacturing sector, as well
as other sectors, went bust during the 1997 economic crisis.

Bustanul said the informal sector would benefit from the
impact of which a healthier state budget would have on the
economy.

National Economic Recovery Committee (KPEN) executive Anton J.
Supit described the LoI as start-up capital for the government to
lead the economy into recovery.

He said the signing of the LoI encouraged foreign investors to
take interest again in Indonesia.

But Anton warned that most of the problems that had blocked
their entrance were related to issues outside the LoI.

"Now that the door has opened to new investment, it will be up
to the government to do its homework on cleaning up old
problems," he said.

He cited rampant security threats, inconsistency in government
policies and legal uncertainty as the real menace behind the
disappearance of foreign investors.(bkm)