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.