Government offensive 'needed to defuse crisis'

Government offensive 'needed to defuse crisis'

JAKARTA (JP): Noted economist Rizal Ramli has criticized the
government for being too defensive in handling the financial
crisis.

Rizal, a director of the Econit consulting agency, said a more
offensive strategy was needed.

He said Wednesday the government's approach had forced it to
become defensive, such as by denying various rumors and calming
down fears, and it lost the ability to take initiatives.

Rizal cited two factors which caused government officials to
become defensive.

First, "intellectual bankruptcy". Due to this weakness,
technocrats had intellectually failed to solve the financial
crisis, which had hit the country since July, he said. Instead,
they sought for an easy way out, including by asking for foreign
assistance and selling state assets at bargain prices.

The second factor was a "leaving mentality". With such a
mentality, he said, many outgoing members of the House of
Representatives only saw the weakness of the government's policy
without giving any concrete solution.

Rizal cited several strategies to deal with the country's
deepening financial troubles.

The government, for example, had to be based in reality by
clearly stating the problems publicly. The political and economic
elite must also be willing to sacrifice.

Rizal said the current cabinet must be reshuffled, even before
the completion of its five-year term in March to wipe out the
"leaving mentality".

"In the run up to March, many things can be done, as has been
shown by South Korea, which could rebuild confidence in two
months," he said. "If the government fails to come out with an
offensive strategy in the next three months, economic problems
could become sociopolitical problems with extensive
implications."

He said priorities, therefore, must be given to monetary and
foreign exchange stability.

According to Rizal, there were four components of the
offensive strategy to salvage the country's economy.

First, monetary and foreign exchange stability. He said
Indonesia must leave the floating exchange rate system and return
to a fixed exchange rate by pegging the rupiah to the U.S.
dollar.

The uncertainty and economic costs of a floating system,
which had been implemented since August last year, was considered
too large.

The system opened ways for external forces to contribute to
setting the exchange rate for the rupiah. Financial centers in
Singapore, London and New York had become places that dealt in
the fate of the rupiah, despite the small transactional volume of
the currency in international markets.

Second, synchronization of the monetary and fiscal policies.
The willingness to sacrifice and concrete measures must be shown
in the State Budget.

Third, improving the health of national banks. The 1988
banking deregulation had boosted the growth of the domestic
banking industry, Rizal said, but failed to provide a prudent
management system.

To revive domestic banking conditions, a merger policy is not
sufficient. It must be based on a thorough financial
restructuring of the domestic banking system, including the
conversion of debt into equity and injection of fresh capital.

Fourth, the restructuring of the overseas debt of private
companies. A conservative estimate showed that the equity-to-debt
ratio of Indonesian conglomerates stood at one-to-eight assuming
an exchange rate of Rp 6,000 to the dollar, he said.

If the rupiah weakened from that level, many private business
groups would technically be bankrupt.

Under such a critical condition, Rizal said, the government
should come up with a restructuring of the country's business
landscape. This might include a leverage buyout of troubled
businesses by the government. (08)