Growth prospects

Growth prospects

Both private-sector and government analysts as well as
international economists, including those of the International
Monetary Fund, remain optimistic that Indonesia's economy would
be capable of expanding by at least 4 percent this year, despite
the return of rupiah volatility and heated political tension in
the runup to the People's Consultative Assembly (MPR) session
next month.

Economists from the Center for Strategic and International
Studies (CSIS) and most securities market analysts argue that
most enterprises have adjusted themselves well to the rupiah's
zigzagging decline and to political woes. Bank Indonesia (central
bank) concurs, saying there is no need to revise its
macroeconomic targets, as the currency volatility and political
uncertainty are only temporary phenomenon which would most likely
diminish after the August MPR session.

This prediction is indeed quite soothing news amid the great
concern about the rupiah's steady depreciation since early May,
that put the national unit mostly above Rp 8,500 against the
American dollar over the past two months, compared to the Rp
7,000 average assumed for the April-December, 2000 state budget.

The message of optimism, however, is not without pitfalls. A
longer period of currency volatility would cast a shadow over the
sustainability of the nascent recovery, as the consumer-led
growth might peter out under a tight monetary policy. A
persistent zigzagging fall in the currency might also hinder the
far-reaching corporate debt restructuring process that is so
vital for the reinvigoration of the real sector.

A volatile rupiah makes debt restructuring much more complex,
as companies find it almost impossible to make sensible business
plans. Further delays in the resolution of the US$70 billion
corporate foreign debt, and a similar amount in domestic
corporate debts, would certainly hinder business operations and
slow the pace of banking recovery.

Exports, which are expected to become another locomotive to
economic recovery, might also be damaged as the huge debt
overhang would continue to deprive the business sector and
domestic banking industry of an access to international
financing. After all, the present multidimensional crisis was in
the first place triggered by the unmanageable level of foreign
corporate debts and the financial distress of most banks.

In fact, higher import costs as the impact of the weakening
rupiah, and the acute shortage of trade financing caused by the
slow progress in the corporate foreign debt resolution, seemed to
have affected exports. Foreign trade statistics for May, as
reported by the Central Bureau of Statistics last week, indicated
that though non-oil exports still expanded from a year earlier,
they dropped almost 3 percent from April.

The political situation within the next eight weeks could be
another pitfall to a sustainable economic recovery. The market
sees vigorous, heated political debates as a normal process in a
democracy. But if the debates spill over to violent street
demonstrations, exports might again suffer another blow as
foreign buyers, worried about delivery, might be prompted to
divert orders to other countries.

Another potential snag to the recovery process is a cabinet
reshuffle, which is strongly expected after the August MPR
session. This move could make or break the credibility of the
government.

The market could also be roiled if the government is not
capable of gaining the public's understanding about the sorely-
needed increases in controlled prices of fuel oil and bus fares,
that have to be effected later this year.

The way local administrations, especially those in rich-
resource provinces, will react to the regulations on the inter-
government fiscal relations, which are scheduled to be issued
within the next few weeks, will also determine whether the
political situation and investment climate in the provinces would
improve or instead worsen.

On top of it all, the progress in the restructuring of the
banking sector is perhaps the most determinant to a sustainable
recovery. Because not a single economy can sustain growth without
a sound banking industry. The dilemma, though, is that the
banking industry cannot grow healthily in a depressed economy.