Growth in manufacturing sector expected to drop

JAKARTA (JP): Indonesia's manufacturing sector will grow only by about 7 percent this year, far lower than 11 percent in 1996, partly due to the impact of the ongoing monetary crisis, says an economist.

The executive secretary of the Institute for National Development Studies, Umar Juoro, said here yesterday the industrial sector faced many challenges that would continue to hamper its growth this year and next year.

"Manufacturing growth may decline to between 7 and 8 percent this year, and would further decline in 1998," Umar said at a seminar on global industrial development.

He said challenges to the sector included high import content, capacity constraint and the lack of liquidity at home.

The sharp fall in the rupiah's value should be an opportunity for export-oriented companies, he said, but most local companies could not take the advantage of the currency's sharp depreciation because of structural problems.

The decline was also triggered by problems facing the financial sector in the country, he said at the seminar held by the United Nations Industrial Development Organization (UNIDO).

Umar said the skyrocketing of lending rates resulting from the monetary policy introduced by the government several months ago to cope with the rupiah's free fall had created a liquidity problem for the manufacturing sector.

At the same time, international funds would be scarcer due to the decline in the confidence of Indonesian companies by foreign creditors.

Reports on the increase of loan defaults had discouraged foreign financial institutions from providing new loans to Indonesian companies, he said.

The stock market had been in equally bad shape, with many industrial stocks undervalued, he said. Many investors were waiting for a better economic environment, he said.

For small- and medium-sized enterprises, which reportedly amount to about 34 million businesses, liquidity constraint would remain a big problem, Umar said.

He said small-scale businesses' financing scheme would be difficult to implement as banks reduced their credit exposure during the tight monetary policy.

The decline in purchasing power might also reduce small- and medium-scale businesses' sales, which was mostly domestically oriented, he added.

UNIDO country director in Indonesia Syed Asif Hasnain attributed the crisis to the changing pattern of investment in the country.

An increasing reliance on debt and portfolio equity made the business sector more vulnerable to risk assessment by foreign investors, he said.

Foreign investors' optimism of regional prospects had also far exceeded the reality of real economic performance, he said.

He said the complexities, interlinkages and impact of money markets were severely underestimated by many.

Economist Thee Kian Wie of the National Institute of Sciences said Indonesia had not been able to make a more effective use of its direct foreign investment inflow for more rapid technological advancement, compared to its Southeast Asian counterparts Singapore and Malaysia.

"To absorb imported technology more effectively, Indonesia will need to build up a much larger pool of skilled workers than it has now," he said.

According to UNIDO's global report on industrial development, banks in Indonesia, as in some other Asian countries, played a dominant role in financing industrial development.

The report says 91 percent of industrial investment in Indonesia came from banks in 1994.

It says policy makers must acknowledge that domestic investment is crucial to sustain the growth of developing countries and economies in transition.

These resources should not accumulate, but should be used more efficiently, the report says.

"A strong system of banking supervision is essential, as well as the creation of effective institutions to regulate financial markets," it says.

Umar Juoro said the ability to transform the financial sector in Indonesia would boost industrial investment in two to three years.

A healthier banking system would allocate credit with competitive interest rates to non-bubble and productive sectors, especially the manufacturing sector, he said.

Improvement in administrative procedures, appropriate incentives and penalties would also support a more efficient credit allocation to small- and medium-sized enterprises, he said.

Umar said the current crisis provided an important lesson to industrial corporations about the importance of focusing on core business transparency, prudence in financial management and flexibility in market orientation.

"The conglomerate way of doing business cannot survive in more open competition," he said.

Investment in the industrial sector must also be carefully assessed to avoid overexpansion, he said.

He said the risk in the fluctuation of the exchange rate should be calculated carefully.

At the seminar, Minister of Industry and Trade Tunky Ariwibowo said in a keynote speech, delivered by the ministry's secretary- general, Aidil Juzar, that the government was committed to continue to undertake necessary reform to strengthen the economy.

This included lowering tariffs in the industrial sector, cutting red tape and providing tax incentives and facilities for promising export companies, Tunky said. (das)