Faltering confidence

The higher-than-expected 4.8 percent economic growth Indonesia posted in 2000 has apparently failed to increase market confidence or raise expectations of a stronger recovery. Instead, last year's economic spurt, from zero growth in 1999 and a contraction of almost 14 percent at the peak of the country's economic crisis in 1998, is expected to cool off this year as a result of external and internal factors.

The World Bank's latest report on Indonesia estimates economic growth this year at 4 percent. This is a base-case scenario, assuming that macroeconomic stability is maintained and structural reforms implemented slowly, with frequent slippages and some policy reversals. The International Monetary Fund believes the best the country can expect is for economic growth to remain flat.

Bank Indonesia has ventured a more optimistic projection of 4.5 percent to 5 percent expansion, but it used economic assumptions that appear to be overly ambitious.

Most private sector analysts are less upbeat, estimating growth at between 3.5 percent and 4 percent. They cite fears that the country's political uncertainty will continue and export growth will slacken to 8 percent from 18 percent last year due to the economic slowdowns in the United States and Japan, which together account for more than 32 percent of Indonesia's non-oil exports.

The optimists -- foremost among them government economists -- predictably contend economic expansion will become more robust as economic activities manage to disengage themselves from the political situation, as they did last year.

But key economic data from the last few months has shown the ominous signs of a weakening pace of recovery. Despite the marked growth of 4.8 percent for the whole year, the economy actually shrank 0.7 percent in the fourth quarter of last year from the previous quarter. Non-oil exports, one of the three main engines of growth last year, fell 10.4 percent in January from December due to a harder-than-expected landing for the U.S. economy. Oil prices "boomed" in the first 10 months of last year before beginning to decline in the last quarter, and they are expected to continue their downward trend throughout this year.

The other two economic engines -- private consumption and investment -- do not show great promise, either. This is the result of inimical domestic factors, notably the political uncertainty and the weakened leadership of the embattled President Abdurrahman Wahid, which have in turn affected the implementation of reform measures and economic management as a whole.

Although the central bank continues to expect private consumption to rise by between 3 percent and 5 percent this year as a result of last year's estimated 16 percent increase in per capita income, that by itself will not be able to offset the decline in exports.

With rising political tension, a shrinking current account surplus due to faltering export growth, rising debt servicing commitments and a vulnerable rupiah, the central bank seems to have no other option but maintain a relatively tight monetary stance.

The problem, though, is that if the central bank keeps its benchmark interest rate at almost 15 percent, where it has been over the last few months, many banks that were recapitalized with fixed-rate government bonds will continue to lose money, because they will have to offer deposit rates higher than the 12 percent returns on the bonds to remain competitive with other banks.

The third economic engine -- investment -- has an even bleaker outlook, due mainly to the political uncertainty, the legal limbo regarding the huge pool of assets managed by the Indonesian Bank Restructuring Agency and the shaky transition from centralization to regional autonomy.

All in all, the outlook is not comforting. The economy will most likely muddle through the multidimensional crisis in which the nation has been mired since 1998. It is hard to believe the optimists' view that the economy will continue to grow robustly, isolated from the increased political turbulence.

Even if President Abdurrahman weathers the attacks of the emboldened opposition, he will emerge as a much weaker head of government who will have to make many compromises at the expense of prudent macroeconomic management.