Faltering confidence

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.