Mixed economic indicators
President Megawati Soekarnoputri conceded in a report to the annual meeting of the People's Consultative Assembly last week that strengthening macroeconomic stability over the past 18 months had not yet been able to fuel higher economic growth. She foresaw the rate of economic growth this year to be stagnant at 3.6 percent, the level of expansion achieved in 2002. That would be lower than the official growth target of 4 percent.
The earnings reports of most publicly-traded companies for the first half by and large confirmed the feeble economic growth, as evidenced by the decline in their profits despite the gains they reaped from the rupiah's appreciation against the American dollar.
A survey by the Danareksa Research Institute in June also found weakening business confidence, as most business leaders said they did not expect any improvement in the pace of economic growth for the rest of the year.
The same survey, however, revealed a slight rise in consumer confidence, even though the general consumer price index, as reported by the Central Statistics Agency for July, indicated a different path of development. Food, beverages and cigarettes posted deflation, reflecting weakening consumer demand. The bureau also reported a 7 percent expansion in non-oil exports for June but a 15 percent fall in imports.
These mixed trends further validate the widely held perception that the overall economic situation remains fragile, highly vulnerable to internal and external shocks.
Just witness how the rupiah, which had appreciated by almost 17 percent throughout last year, so easily lost more than 5 percent of its value against the dollar in the last 10 days of July alone due largely to the controversial government plan to slap tax on earnings accrued in mutual funds invested in bonds.
Seen in this context, the government decision last month not to make early repayment of its debts to the International Monetary Fund, as strongly suggested by several Cabinet members, politicians and economists, is indeed quite wise.
The US$34 billion international reserves held by Bank Indonesia, though quite large by Indonesian standards, may not be strong enough to defend the rupiah in case of major currency attacks set off either by internal or external shocks. It is precisely because of this fragile economic condition that the country needs higher foreign reserves to serve as a buffer than what would be considered adequate under normal circumstances.
Of greater concern is the increasing tendency toward weakening business confidence, as further reflected by Bank Indonesia's reports last month that almost Rp 80 trillion in approved bank credits had not been disbursed.
Business confidence is quite crucial for fueling economic growth because it is businesspeople that take the risks by plowing their capital into economic activities, thereby increasing tax receipts. It is businesses that create jobs and consequently generate purchasing power to fuel consumer demand.
The government and economists already know where the roots of the problems lie. They share the view that the slow pace of structural reform is the main cause of persistently weak business confidence. The delay in instituting reforms, especially in the financial, legal and public governance sectors, has caused business risks to remain high.
Set against this background, there is no further need to emphasize the importance of the reform agenda the government will unveil on Aug. 15 when the President proposes her 2004 budget to the House of Representatives.
Certainly, the reform agenda and its technical details, such as implementation schedules and targets, will not be a panacea that will reinvigorating business sentiment overnight. However, a well-designed reform mechanism with clear-cut schedules and targets will provide businesspeople with a clear indication of the future path of economic policies and development.
Further down the line, this will enable businesspeople to sensibly assess business risks. After all, business is a game of risk calculation.