Less upbeat for 2001

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.