No longer business as usual

No longer business as usual

The Indonesian government and the House of Representatives
would only delude themselves if they thought the September 11
terrorist attacks on the heart of the United States financial
industry would not adversely affect the U.S. economic
fundamentals, hoping it would be back to business as usual within
a few weeks.

However successful might be the American efforts to generate
pump priming and to prevent the market confidence from
collapsing, Indonesia and other Asian countries would immediately
suffer a ricochet impact through trade beginning in the last
quarter of this year.

The tragedy at the bastion of the U.S. financial market, and
consequently the world's financial center by way of the American
role as the largest economic powerhouse, could have hardly
occurred at a worse time as the U.S. economy has been on the
brink of recession since early this year. Consumer confidence,
the only strength that had prevented its economy from plunging
into a deep recession, was dealt a double hit.

Worse still, Japan, the second locomotive for the global
economy, is itself suffering a negative growth and could head
into a deeper slump, given its heavy dependence on the American
market and its huge investment in the American economy.

Unfortunately, these two countries alone usually take up
almost 50 percent of Indonesian exports. Europe too does not look
good either, as reflected in the bearish trend in its stock
markets.

What this distinctly gloomy outlook boils down to is a stern
warning that the favorable external factor that greatly helped
the Indonesian economy gain a respectable growth of 4.8 percent
last year despite the much slower-than-expected implementation of
its economic reform has dissipated.

In fact, even before the attacks that severely battered the
American travel industry, especially airlines, insurance and
brokerage houses, Indonesia's economy grew only 0.18 percent in
the second quarter, compared to the previous quarter, as export
growth slowed down due to the decline in consumer demands in the
two economic powerhouses.

It is certainly too early to assess the severity of the
terrorist attacks on the American economy and how adversely it
would affect the basic assumptions used for the Indonesian budget
proposal for fiscal year 2002. The hundreds of companies, banks,
insurance firms and brokerage houses that had offices in the
collapsed World Trade Center are still taking stock of their
material losses and, most importantly, the human cost or losses
of brainpower (skilled personnel).

Moreover, a wider, more lasting impact would still depend on
the kind of retaliation the American government would unleash and
on what would be the perceived risks of investing in the U.S. and
of Americans traveling overseas either for leisure or business.

Such pump priming measures as the decision by the U.S. Fed to
slash its key interest rate by a half percentage point ahead of
its regular meeting scheduled next month, the US$40 billion
additional budget President George W.Bush got to deal with the
terrorist attacks and the willingness of European and Japanese
central banks to pump liquidity into the system to reduce the
risk of panicky investors and depositors would help prevent
market confidence from a total collapse.

But one thing is crystal clear. Consumer confidence, already
under pressure, is bound to weaken further and this will
debilitate business investment. One should note that consumer
spending alone constitutes two thirds of the American economy.

It is therefore more imperative now than ever for the
Indonesian government and the House to strengthen their
cooperation in accelerating all the reform measures essential to
generate a sustainable recovery. Another slippage in the sorely-
needed reform, due, for example, to disproportionate or
irrational nationalist sentiments, could lead the economy into
the abyss.

There is no other choice for the government now: Either
accelerating the pace of asset recovery, corporate debt
restructuring, privatization of state companies and tax-base
expansion or suffering from a far more devastating crisis because
nothing would happen in the way of sustained economic pickup
without significant progress in these measures.