Not business as usual

Not 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 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 a ricochet impact
through slower 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 already 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 greatly 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 what would be 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. These 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.