Improving market perception

The government's pronouncement that the economy would still be able to achieve 5 percent expansion next year, in spite of the horrific bomb attack in Bali, could be harmless if it was meant simply to prevent an inordinately pessimistic climate.

However, such a persistently upbeat mood could only be self delusion, false optimism and could even be greatly damaging to the economy if it is also translated into policy making.

The blunt fact is that the tragedy has caused a big setback in almost all sectors and destroyed the momentum for a robust economic recovery that had actually been created by the strengthening of macroeconomic stability since early this year.

First of all, the terror bomb that generated headline news all over the world has increased Indonesia's country and sovereign risk ratings, which in turn caused negative market perceptions for its economic prospects and damaged business and consumer confidence. The immediate costs will likely be big losses in foreign exchange revenues from foreign tourists and in tax receipts from travel-related businesses with all the negative impacts on government spending.

The costs of heightened security and higher risks in the wake of the bomb attack will increase risk premiums on transactions within the country and between the country and foreign parties and this will, in turn, impair export competitiveness.

At a time when exports are expected to contribute more to growth to offset the slackening consumer spending, which has so far been the main locomotive of economic expansion, foreign buyers might refrain from buying from Indonesia out of fear of failed or delayed deliveries due to high security risks.

Even more worrisome, is that the heightened security risks will consequently increase business risks. This, in turn, could cause more bad loans and turn newly restructured credits sour again, thereby threatening the fragile banking industry.

While businesses badly need loans to expand operations, many banks may become inordinately cautious about any new lending due to fears of worsening capital standards.

The negative market perception of the economic outlook would also adversely affect the many reform measures that are badly needed to fuel a stronger recovery. The biggest toll may be in asset recovery and privatization as foreign investors could shun the country -- at least until all the questions around the bomb attack are resolved. State-owned Bank Mandiri, for example, was immediately forced to postpone its initial public offering and the divestment of many other state-owned assets became uncertain amid the bearish market perception.

All these risks can only be overcome by stronger government leadership in taking decisive policy action to accelerate the implementation of reform measures and to maintain policy coherence.

Only a more rapid privatization and asset recovery, accelerated adoption of structural reform measures and more vigorous tax collection can create a virtuous circle of increased market confidence, a stronger exchange rate and declining interest rate.

This is, for example, a critical and opportune time to make a firm decision on the restructuring of all small- and medium-scale business debtors to release them from the bondage of their debts and allow them to thrive in the open market.

But market confidence is vital because the wellsprings of economic growth are not just technology, investment and consumer spending. They also include the spirit of risk taking by entrepreneurs.

However, investors will not be willing to risk their capital in the absence of decisive policy action on the part of the government. Only under strong government leadership, characterized by firm and consistent policy action can businesses be confident enough to weather all the negative pressures from the heightened security risks, in order that they can be optimistic about the long-term outlook of the economy.