Investment, growth prospects remain gloomy

Investment, growth prospects remain gloomy

Vincent Lingga, The Jakarta Post, Jakarta

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

Private spending will decrease along with a decline in
consumers' disposable income 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 a higher property tax rate.

Nevertheless, the government seems confident that favorable
macroeconomic conditions, supported by the stronger political
stability, will be conducive for bolstering export and investment
in order 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 the estimated 3 percent increase this year.

However, this projection seems too high as the latest
indicators from the world's economic powerhouses, the United
States, Japan and Europe, portend a lower economic expansion for
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, and are consequently shifting their orders
to other countries.

Worse still, the manufacturing sector could encounter keener
competition from the import sector 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, which is expected to be the third source
of fuel for growth, is not promising either. Not only will the
government's investment in development spending decrease by 5
percent in real terms, but it will not provide much stimulus for
private investment as 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, the majority of foreign investors will most likely
remain on the sidelines, waiting for a significant improvement 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 its designed capacity. Resource-based ventures,
such as mining, fisheries, plantations and other agro-based
industries, which are supposed to be the most prospective
businesses, are rendered unfeasible due to the hostile 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 continue to be 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 exigencies of the
situation and set the right priorities accordingly, while
improving cooperation and coordination.

Domestic investment, for example, continues to be commercially
feasible and is, in fact, sorely needed to modernize plant
machinery and equipment to diversify products into higher value-
added goods and to improve competitiveness. This would only be
possible if 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 still interested in coming in,
but through the acquisition of business assets managed by the
Indonesian Bank Restructuring Agency and of certain state
companies.

Most important, though, is for the President or the 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 needs to go all out
with effective communications to convince regional
administrations of how vital a business-friendly environment is
to attract investment, without which the regional economy will
never expand to improve people's welfare.