Political gestures vital to calm the market

Political gestures vital to calm the market

The Central Bureau of Statistics (BPS) revised downwards on
Monday its projection regarding Indonesia's economic growth this
year, from about 4 percent to 1.5 percent, due to continuing
political instability. Secretary of the National Economic Council
(DEN) Sri Mulyani Indrawati disagrees with the BPS projection.

Question: What do you think about the BPS downward projection?

Mulyani: It is unwise for BPS to make such projections because
statements like this might make the economic situation worse. It
must have a sense of responsibility for the macro-economic
development in the country. Actually, a statistical institution
should not make any projections at all. A projection, if it fails
to materialize due to change of circumstances, might be damaging
to BPS's own reputation as people will question the quality of
the statistics it produces.

But do you foresee the economy growing less than 4 percent
this year?

We could create a bad scenario if we made linear projections
based on data from the first quarter's economic growth. Data
produced by the BPS shows that the economy during the first
quarter of this year did not grow as highly as expected. (The
economy, according to BPS, grew by 1.98 percent during the first
quarter of 2000, as compared to the fourth quarter of 1999).
Furthermore, lending activities of commercial banks (on which
about 70 percent to 80 percent of Indonesia's economic growth
depends) continued to grow negatively until the first quarter of
this year.

However, I believe that the economic growth will pick up
during the fourth quarter and even, perhaps, in the third quarter
as well, due to seasonally higher consumer demand and improvement
in the conditions of the banking industry. Consumer demand will
surely increase in the forth quarter because of several sectors,
such as the observance of Idul Fitri Muslim holiday. In the
second half of the year, major commercial banks will also
finalize their recapitalization programs, after which they can
increase their lending activities. Increased lending activities,
in turn, will help reinvigorate economic activities.

The state-owned Bank Mandiri, for example, has now finalized
its recapitalization program, while the state-owned Bank BNI will
follow suit in July and other major banks, like Bank Danamon and
Bank Niaga, will do so in the following months.

Because the expected high economic growth in the third and
fourth quarters will compensate the lower growth in the previous
two quarters, I do not see any reason for a pessimistic
projection of growth -- of less than 2 percent -- for the
entireyear of 2000.

Could we expect such high growth even if we saw political
instability in the coming months?

If political instability occurred in the coming months and the
government could not control the situation, of course, we would
not be able to expect positive growth in the economy because the
rupiah's conversion rate would weaken drastically and banking
interest rates would soar. High interest rates would raise the
government's obligations to pay interest on its bonds and,
therefore, reduce its funds to be allocated for the stimulation
of economic activities. High interest rates would also reduce the
lending activities of banks, which would become more conservative
in evaluating the feasibility of its customers' businesses.

But the rupiah's value has now depreciated to about Rp 8,500
against the U.S. dollar. Can we expect the rupiah to reappreciate
to last month's level of about Rp 7,500 a dollar?

Not in the coming one or two months because the government has
thus far failed to create market confidence.

But we can expect the rupiah to stabilize at about Rp 8,500 a
dollar or even at Rp 8,000 if the government is firm and
consistent with the terms mentioned in the Letter of Intent (LoI)
it signed today (Wednesday) with the International Monetary Fund
(IMF), as well as systematically disseminating information on
concrete programs that it will implement in the coming months.

If the government can make economic achievements within two
months and the achievements can encourage the IMF to give a
rating of A plus in its review on the government's compliance to
the LoI, the rupiah's value is expected to appreciate.

President Abdurrahman (Gus Dur) Wahid has instructed Finance
Minister Bambang Sudibyo to ask state banks to buy rupiah in a
bid to shore up the currency. Will it help?

State banks have no such capacity because their participation
in the recapitalization program indicates that they are too weak
to function as instruments for monetary stabilization. I think
the finance minister has informed Gus Dur about the banks'
obligations to comply with the rules related to the
recapitalization program. Moreover, such a measure is under the
authority of the central bank, which is now independent from the
government.

What measures should the President take to calm down the
market?

Because the market jitters have been caused by political
uncertainty, the President should try to calm down the market by
introducing political policies, not political statements, that
will create certainty and stability in the country. (riz)