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.