Thu, 20 Sep 2001

No longer business as usual

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

However successful American efforts might be in generating pump priming and preventing market confidence from collapsing, Indonesia and other Asian countries will suffer immediate impact in terms of trade beginning in the last quarter of this year.

The tragedy at the bastion of the U.S. financial markets, and consequently the world's financial center, by way of America's role as the largest economic powerhouse, could have hardly occurred at a worse time, with the U.S. economy teetering 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 blow.

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

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

What this distinctly gloomy outlook boils down to is a stern warning that the favorable external factors that assisted the Indonesian economy achieve respectable growth of 4.8 percent last year, despite the much slower-than-expected implementation of its economic reform, have dissipated.

In fact, even before the attacks, which 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 demand 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 could affect the basic assumptions used for Indonesia's 2002 draft budget. The hundreds of companies, banks, insurance firms and brokerage houses that had offices in the collapsed World Trade Center buildings are still taking stock of their material losses and, most importantly, the human cost and loss of intellectual assets.

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

Pump priming measures could help prevent market confidence from completely collapsing. Such measures include the decision by the U.S. Fed to slash its key interest rate by half a percentage point ahead of its regular meeting scheduled next month, the US$40 billion in additional funds 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 investors and depositors panicking.

However, 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 instigating a sustainable recovery. Another slippage in the sorely-needed reforms, due for example to disproportionate or irrational nationalist sentiment, could lead the economy into an abyss.

There is no other choice for the government now: either accelerate the pace of asset recovery, corporate debt restructuring, privatization of state companies and tax-base expansion, or suffer the consequences of a far more devastating crisis. Nothing can happen in the way of sustained economic recovery without significant progress in these areas.