Less upbeat for 2001

Booming exports and high, stable oil prices, combined with improving consumer confidence following the first democratic election of Indonesian President in over four decades in October, 1999, have boosted the economy with a growth rate of at least 4 percent this year, compared to zero growth in 1999 and a contraction of over 14 percent in 1998.

Theoretically, market confidence resulting from this recovery should pump up the economy to even greater expansion next year because investment would join private consumption and export as the locomotive of growth.

Unfortunately, this otherwise natural progression of recovery is not firmly secured as we are entering the new year with a great sense of foreboding about the political, social and security situation. The momentum of optimism and market confidence that emerged early this year has now faded and an air of overwhelming uncertainty has gradually engulfed the nation.

The upbeat market sentiment early this year has turned bearish amid worsening political uncertainty, the breakdown of law in several areas, emboldened separatist sentiments in Aceh and Irian Jaya and increasingly adversarial relations between President Abdurrahman Wahid and the House of Representatives.

And if the situation is not murky enough, all these problems are being compounded by great concerns about the possible failure of the implementation of political and fiscal decentralization to provinces and districts scheduled to start next month.

Economic growth and robust exports seem to have been irrelevant to the financial and capital markets. The rupiah's exchange rate against the American dollar is now more than 21 percent lower than in January. Investors who believed the bullish projections propagated by most securities analysts early this year got burned as the Jakarta stock market has lost more than 53 percent of its January capitalization. The depressed condition of the stock market is even more worrisome because it is a truer reflection of the pessimism of domestic investors who now account for more than 75 percent of transactions.

Most international investors, who early this year nurtured big hopes that Indonesia would return to a more stable environment, have virtually written off the country from their map of business opportunities. They don't expect any significant improvement in the business climate soon because the government continues to backslide on its commitments to reform measures that are the only way out of the current multi-dimensional crisis.

The persistent spat between the government and the International Monetary Fund, the leader of the international bailout program for Indonesia since November, 1997, as reflected in the delay of its loan disbursement in April and December, obviously does not help improve creditor sentiment toward the country.

Therefore, private consumption and export will likely remain the main locomotive of economic activities next year as there will hardly be new investments by either domestic or foreign businesses because of the uncertainties. Even existing foreign and domestic enterprises, many of which are still burdened with mountains of debt, will likely find it difficult to raise operating capacity due to the drying up of foreign loans and the inability of most domestic banks to resume lending at significant levels.

External factors, so far a boon to the export sector, will not help either, due to the economic slow down and widely-expected soft landing next year by the world's biggest economic powerhouse, the United States, after almost a decade of steady, strong growth.

Little wonder, therefore, that most private-sector analysts and businesspeople foresee a slackening pace of economic growth to between 4.2 percent and 4.5 percent next year, lower than the more bullish government projection of a 5 percent to 6 percent.

But even this projection could be too optimistic if political and security conditions do not improve.

As far as the economic sector is concerned, the question is not what measures should be taken but rather how the government can accelerate implementation of its reform programs, as already agreed with the IMF.

The top priority programs that are preconditions for a sustainable, stronger recovery remain the same: faster recovery of distressed assets and corporate debt restructuring by the Indonesian Bank Restructuring Agency and marked improvement in the credibility of the law enforcement system. Without stronger resolve and consistency in implementing these programs, the recovery process will remain weak, highly vulnerable to political turbulence.

Asset recovery or sales not only will pump revenues to the state budget but also will put the assets in the hands of new, more bonafide investors. Debt restructuring will release businesses from the hostage of its creditors and restore their creditworthiness to obtain new credit lines. Credible law enforcement will create a strong platform of expectations that can guide official and corporate behavior into good governance practices.