Growth in manufacturing sector expected to drop

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)