Investment and growth

Investment and growth

Most analysts see the government's estimate of 5 percent
economic growth for 2003 as too optimistic because consumer
spending, thus far one of the biggest locomotives of economic
expansion, besides exports, is expected to slacken as a result of
the contractile fiscal policy, while foreign investment will
likely remain moribund.

Private spending will decrease along with the decline in
consumers' disposable incomes as the government will extract more
than what it will inject into the economy through a vigorous tax
collection, the addition of services subject to value added tax
and higher property tax rates.

But the government seems nevertheless confident that the
favorable macroeconomic condition, supported by the stronger
political stability, will be conducive to bolstering exports and
investment to offset any decline in the contribution of consumer
spending to growth generation.

This confidence can be seen from the budget projection which
more than doubles the target of export growth to 7 percent next
year from an estimated 3 percent increase this year.

However, this projection looks too high as the latest economic
indicators in the world's economic powerhouses, the United
States, Japan and Europe, portend a lower economic expansion next
year.

Moreover, the increasingly radical labor movement has made
many importers overseas worried about the ability of Indonesian
companies to deliver such fashion-sensitive goods as footwear,
textiles and garments, consequently shifting their operations to
other countries.

Worse still, the manufacturing sector could encounter keener
competition from imports as more goods from neighboring countries
such as Thailand, Malaysia and the Philippines may inundate the
domestic market under the ASEAN Free Trade Area beginning in
January.

Investment spending, expected to be the third source of fuel
for growth, is not promising either. Government investment
(development spending) not only will decrease 5 percent in real
terms. It will not provide much stimulus for private investment
because only a very small portion of the spending will go to the
development or maintenance of physical infrastructures. The bulk
of the public sector's investment will be allocated to poverty
alleviation and public-welfare programs such as education, health
and housing.

Certainly, most foreign investors will most likely remain on
the sidelines, waiting for significant improvements in law
enforcement, a business-friendly stance on the part of regional
administrations and less rigid labor regulations

Moreover, the manufacturing sector does not provide much
opportunity for green-field investment projects as it still
operates below designed capacity. Resource-based ventures such as
mining, fisheries, plantations and other agro-based industries,
supposed to be the most lucrative businesses, are rendered
unfeasible due to an inimical regulatory environment caused by
the excesses of the start-up process of regional autonomy.

Domestic investment is out of the question because many
businesses remain hostage to bad debts, the condition of the
banking industry is still fragile and interest rates are
persistently high.

The budget estimates the central bank's benchmark interest
rate at an average 13 percent, compared to 16 percent this year.
This means lending rates will range from 18 percent to 20 percent
because national banks are still inefficient with intermediation
costs varying from 5 percent to 7 percent.

Is the prospect for higher growth really so hopelessly grim?

Not necessarily, if the government and regional
administrations are fully aware of the exigency of the situation
and accordingly set the right priority and improve cooperation
and coordination.

Domestic investment, for example, is still commercially
feasible and is in fact badly needed to modernize plant machinery
and equipment in order to diversify products into higher value-
added goods and improve competitiveness. But this will be
possible only if the resource-based businesses such as wood,
fisheries, mining and plantations are released from the prison of
their debts to reopen their access to new credit lines.

Likewise, foreign investors are till attracted to come in but
through the acquisition of business assets currently managed by
the Indonesian Bank Restructuring Agency and of certain state
companies.

Most important, though, is for the president or chief
economics minister to provide effective leadership for the top-
priority programs that are most influential to bolstering export
and investment.

The national political leadership also need to go all out,
through effective communications, to convince regional
administrations of how vital a business-friendly environment is
to attract investment, without which their regional economy will
never expand to improve the welfare of their people.