Glimmers of recovery

Glimmers of recovery

Indonesia's Central Bureau of Statistics finally confirmed
what has been felt by producers of consumer goods and durables
since November: glimmers of recovery from depressed market
demand.

The bureau announced on Wednesday that the battered economy
posted a robust pickup in the last quarter, expanding 5.76
percent from a year earlier when the country was mired in its
worst economic recession in more than 30 years. Though the growth
(in terms of real gross domestic product or GDP) for the whole of
1999 was only 0.23 percent due to contraction of almost eight
percent in the first quarter, the last quarter represented the
third consecutive quarterly growth this year. A significant turn-
around compared to a GDP fall of almost 14 percent in all 1998.
The bureau predicted that the economy could expand more than 4
percent this year if the situation continues to improve.

However, further reading into the batch of data released by
the bureau showed that real, sustainable recovery has yet to take
root. The growth was generated mainly by household consumption,
which for last year expanded 1.5 percent, and public-sector
(government) spending that grew 0.7 percent, while private
investment remains in the doldrums.

Strong consumer confidence resulting from the stable political
condition and better security situation has increased private and
public consumption and boosted domestic market demand. In fact,
carmakers and retail stores have booked bigger sales since the
peaceful passing of the June general election. Even exports,
which previously were hindered by lack of trade financing and
fragile security condition, expanded in the last four months of
last year.

While the economy is showing some improvement it is, however,
too early to conclude that a strong rebound has finally emerged.
Part of the big increase in private spending in the last
semester, especially the last quarter, seemed attributable to
deferred consumption as people, attracted by high deposit rates
in 1998 and the first half of 1999, preferred to keep savings in
banks.

But most manufacturing companies still suffer excess capacity
due both to lack of market demand and inability to obtain new
lines of credit for working capital. More worrisome, is that
private investment, usually the strongest locomotive of growth,
remained contracted even at a declining pace.

Still damping the economic growth is the deadlock over the
restructuring of corporate foreign and domestic debt and the
crippled banking industry, two key problems which are related to
each other. Simultaneous resolution of these two woes is the real
nut and bolt of sustainable recovery.

Unless the bad debtors, consisting of thousands of small,
medium and big-scale enterprises, currently under the management
of the Indonesian Bank Restructuring Agency, restructure their
loans, the manufacturing industry will remain in the doldrums.
Without that restructuring they will remain inaccessible to new
lines of working-capital credits, a prerequisite for them either
to resume or increase their rate of production. Similarly, until
the huge burden of foreign corporate debts, estimated at more
than US$60 billion, is restructured or rescheduled, foreign trade
financing will remain a major hurdle to exports and imports. This
is especially damaging as imports are still the biggest source of
capital goods for investment and industrial materials and
components.

Likewise, a sustainable strong recovery will never emerge if
the banking industry cannot resume major commercial lending. The
signs so far are not encouraging as the biggest private-sector
and state banks, which account for more than 80 percent of the
industry's activities, remain undercapitalized in the real sense.
The equivalent of billions of dollars worth of treasury bonds put
in their balance sheet as quasi capital to raise their capital
adequacy ratio to the minimum 4 percent cannot do much to
increase lending capacity if the government does not act soon to
create a secondary market for the debt papers.

But even if government intervention could quickly facilitate
an active market for the T-bonds, thereby enabling banks to raise
more liquidity, it would still be difficult for banks to find
creditworthy enterprises to lend to, unless IBRA and the
thousands of debtors cannot speed up the process of debt
restructuring.