Mixed economic indicators

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.