Gains from perceived stability

Gains from perceived stability

The almost 14 percent appreciation of the rupiah against the
U.S.dollar immediately after the dismissal of Abdurrahman Wahid
from the presidency last week shows how enormous have been the
damages on the economy inflicted by his erratic leadership.

The rupiah and the stock market have been strengthening since
early last week entirely because the end of Abdurrahman's
presidency was seen as a resolution to the political impasse and
uncertainty, and an end to the confusion and chaos in the
decision and policy-making machinery.

The rupiah appreciation is simply due to the market perception
that the overall outlook now will most likely be a stable
environment, a predictable policy-making process and a
cooperative legislature, which are prerequisites for pushing
ahead with the reform agenda.

One may argue that so far the improvements have only been in
the financial market, which is highly vulnerable to rumors and
speculative transactions, and that they are not related to the
economic fundamentals or the real sector. Yet the positive
indicators cannot be simply discounted as a market game of
speculators.

In fact, the steady weakening of the rupiah, especially over
the past 12 months when former president Abdurrahman was
preoccupied with defending his power with all sorts of tactics at
the expense of national stability, has been one of the primary
causes of the economic bleeding.

The rupiah depreciation alone has caused a chain of damages on
the economy, forcing a mid-term revision of the state budget and
making debt restructuring more difficult. The rising costs of
imports have forced the central bank to maintain a tight monetary
policy to curb inflationary pressures. This credit crunch in turn
has hurt business operations, threatening the weak banking
industry with further capital erosion and the state budget with
an unsustainable fiscal deficit.

The positive market signal will surely be a valuable asset for
the new president, Megawati Soekarnoputri, to embark on her
immense task of addressing the array of economic and social
problems.

This does not, however, mean the tasks facing the Megawati
administration will be less challenging. In fact, the economic
bleeding over the past year has made the problems more daunting.

The most pressing and urgent agenda remain centered on
corporate debt and bank restructuring, recovery of the huge pool
of assets currently managed by the Indonesian Bank Restructuring
Agency (IBRA) and privatization of state companies. All these,
like the weakening rupiah, have been responsible for the economic
bleeding. Consequently, this bleeding has to be stopped to
maintain the budding economic recovery.

No wonder, analysts are waiting eagerly for the economic team
of the new Cabinet to be announced this week as Megawati's
performance will be judged primarily on her administration's
economic performance.

Whether the market gains from the fall of Abdurrahman's
administration will strengthen or weaken, will depend on the
caliber of the those appointed to the economic portfolios.

If the new economic team consists of well-respected
professionals of high integrity whom the business community is
comfortable with, the market perception of the new administration
will become more positive even before the new Cabinet starts to
prove its worth. On the other hand, the new Cabinet
can plunge into an inimical market environment if the integrity
and competence of the economic team are sacrificed for political
interests in the formation of a coalition Cabinet.

Unfortunately, President Megawati will not have the privilege
of a honeymoon period as most new administrations do. She should
soon come up with a credible economic team and a cohesive
economic policy to convince the market, the International
Monetary Fund and creditors of the Consultative Group for
Indonesia.