Government cautioned on signs of economic recovery

JAKARTA (JP): Experts have warned the government not to overreact to early signs of an economic recovery, as a fundamental economic turnaround was yet to arrive.

Senior banker I Nyoman Moena said at the weekend that excessive optimism might lead to a misjudgment of the real situation and lead to the development of incorrect policies.

"We must be extra careful in reading the (economic) indicators. The fundamentals (for a sustainable recovery) are not there yet," he told The Jakarta Post.

Moena called on the central bank not to be too hasty in allowing domestic interest rates to drop, as the rupiah was still volatile and an inflationary threat remained.

"There is still a big question mark over the (economic) developments. If interest rates plummet we may get trapped. A rush on the banks may happen again," the former central bank director said.

The Central Bureau of Statistics (BPS) announced last week that the economy grew by 1.34 percent in the first quarter of 1999, from the fourth quarter of last year. It also reported that inflation in April was negative at 0.68 percent, better than the negative inflation of 0.18 percent in March.

The rupiah continued to stabilize at Rp 8,000 per U.S. dollar, despite the declining trend in domestic interest rates. A few months ago, the local currency was hovering between Rp 8,600 to Rp 8,900.

The stock market has been bullish for the past few weeks, driven by an inflow of foreign funds.

The encouraging developments have prompted government officials to express optimism the country will achieve economic recovery earlier than expected.

Coordinating Minister for Economy, Finance and Industry Ginandjar Kartasasmita said the government was considering a revision of its economic growth projection in the 1999/2000 fiscal year to between 0 percent to 2 percent, from earlier estimates of zero growth.

He forecast that inflation would be around 10 percent, compared to an initial prediction of 17 percent.

Ginandjar expected domestic interest rates to drop below 30 percent before the end of the month, while Bank Indonesia Governor Sjahril Sabirin projected interest rates would fall to between 20 percent and 25 percent before the end of the year.

The interest rate for the benchmark central bank one-month SBI promissory note is currently at slightly above 31 percent.

Pande Radja Silalahi, an economist at the Centre for Strategic and International Studies, said the government was overreacting by revising economic assumptions amid the persisting uncertainties.

He said the fate of the government bank restructuring program, along with efforts to restructure the banks' non-performing loans (NPLs) had yet to be resolved.

"The government is overly optimistic. There's no guarantee for the two programs to work as planned."

Pande said a slowdown in the programs could be detrimental for confidence building, a key element for a sustainable economic recovery.

The government has closed down many ailing banks and plans to recapitalize nine private banks, take over 11 private banks, seven state banks and 12 provincial development banks, at a total cost of some Rp 500 trillion (about US$62.5 billion).

But the success of the recapitalization program would also depend on the restructuring of the banks' NPLs.

The government plans to start the restructuring of the NPLs with the 20 largest debtors of state banks.

The government delayed the initial April 30 restructuring deal, which was rescheduled for agreement with the 20 debtors in late August. Many believed that the postponement of the plan was the result of pressure from well-connected debtors.

The Indonesian Bank Restructuring Agency (IBRA) has assumed over Rp 100 trillion in NPLs from the seven state banks, of which approximately Rp 60 trillion is believed to be owed by the 20 largest debtors.

IBRA has also surrendered to pressure to return some of the NPLs to the state banks. IBRA deputy chairman Eko S. Budianto said on Friday the agency would hand over the management of individual NPLs of less than Rp 25 billion back to the state banks.

Pande also said the April negative inflation was not a sign of a deflationary trend to justify the central bank's plans to lower interest rates.

"The negative inflation was primarily caused by the declining purchasing ability of people," he said.

Indonesia suffered more than a 13 percent economic contraction in 1998, causing millions to lose their jobs. The economy continued to contract by more than 10 percent in the first quarter of 1999, compared to the same period last year.

"The economy will remain under strong pressure in 1999," said BPS chief Suwito Sugito.

He forecast the economy would contract by 1.02 percent in 1999, assuming that the upcoming June general election was nonviolent and credible. (rei)