Govt told to safeguard domestic economy

Govt told to safeguard domestic economy

Berni K. Moestafa, The Jakarta Post, Jakarta

Experts have urged the government to ensure legal certainty
and restore security in order to attract new investment to help
cushion the country from the looming global economic slump.

Former finance minister Bambang Sudibyo said that the
administration of President Megawati Soekarnoputri must give
a signal to the market that it was serious in resolving the
present legal imbroglio and ongoing security problems.

"The key is to attract new investment, but we need legal
certainty and security guarantees. This is what has been
lacking," Bambang told The Jakarta Post on Sunday.

He explained that there was strong evidence now that the world
economy was heading toward a recession, but there was nothing the
government could do to prevent it from happening except to
moderate the impact on the country by taking concerted measures
to prop up domestic investment.

Centre for Strategic and International Studies (CSIS)
economist Hadi Soesastro concurred.

Hadi said that the government must resolve "the domestic
mess", including security and legal problems, to entice new
investment so as to help the economy to grow and create more
jobs.

"An economic package alone will not be sufficient," he said.

Some businessmen had earlier called on the government to
provide an economic stimulus package, as have been prepared by
other governments in the region, to help the country brace itself
for the economic repercussions of last month's terrorist attacks
in the U.S.

The attacks have left the world teetering on the brink of a
recession, pushed by a sharp plunge in U.S. consumer and business
confidence.

Economist Umar Juoro of the Association of Indonesian Muslim
Intellectuals (ICMI) predicted the global economic slowdown would
extend well into next year.

"It's going to be tough without a stimulus package from the
government," he told the Post over the weekend.

But Umar said Indonesia could hardly afford a spending binge
to spur economic growth given its gaping budget deficit.

Instead, he suggested redirecting bank credit portfolios away
from Bank Indonesia promissory notes to the productive sector.

Since the 1997 financial crisis crippled the country's banking
sector, many banks have come to rely on government bonds and Bank
Indonesia certificates, known as SBIs, for their earnings.

This situation places huge fiscal constraints on the budget,
as the government must pay interest on the bonds.

Umar said that if the banks were to skim off 10 percent of
their bond interest earnings and allocate it to fresh lending,
then economic growth should be stimulated.

"It's public money, and most banks are now state-owned
anyway," he said.

Banking analyst Mirza Adityaswara at PT Indosuez W.I. Carr
Securities said Bank Indonesia should ease its monetary policy.

"A one percent cut in SBI rates amounts to a saving of Rp 2.5
trillion, which the government can spend on development," he
said.

Thus far, Bank Indonesia has persisted in keeping rates high
in order to lower the base money supply to Rp 110 trillion.

Meeting that target is one of the promises the government has
made to the International Monetary Fund (IMF).

Mirza said the government should persuade the IMF to ease its
base money target to allow the central bank to lower SBI rates.

Senior economist Raden Pardede at PT Danareksa Securities
concurred, but cited security, political and legal certainty as
preconditions.

"Uncertainty makes people run for cash which raises the base
money supply, hence we have high SBI rates," he said.

Raden said a fiscal stimulus under this and next years' tight
budgets was unlikely unless the government aimed for higher
revenue targets.

Tax collection, privatization, asset sales, and raising new
foreign loans were among the best options for achieving that
goal.

But he warned that the rising nationalism of legislators would
likely hamper the achievement of privatization and asset sales
targets.

"If we want a stimulus there is a price to pay, like paying
interest on new loans or losing ownership of assets," he said.