Improving market perception

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.