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.