Polls buoy economy
Polls buoy economy
The peaceful and fairly clean legislative election on April 5
has strengthened the virtuous circle in the economic sector, as
reflected in the bullish sentiment on the Jakarta Stock Exchange
(JSX) and the relatively stable rupiah exchange rate, which in
turn has curbed inflationary pressure and provided more leeway
for the central bank to ease its monetary policy.
This virtuous circle has further enhanced macroeconomic
stability and made the economy more capable of weathering such
minor tremors as the recent closure of two banks in Bali and
Jakarta.
The virtuous circle accelerated immediately after the polls
closed, with the JSX index gaining more than 2.7 percent on April
6. The index lost 1.5 percent on April 12, due largely to
negative sentiment triggered by a joint statement reportedly from
19 minor political parties rejecting the poll results and
demanding new elections.
The upbeat sentiment returned to the market immediately after
it became clear the joint statement was simply a bluff by
politicians disillusioned with the utterly poor showing of their
parties in the elections. Most of the parties eventually watered
down their protest, especially after public opinion turned
against the politicians, who were labeled "bad losers".
The bullish market has steadily become stronger, with the JSX
composite index leaping to 810.85 on April 20, its highest level
since the JSX was revamped in August 1977. Its previous high was
740.83 in early July 1997, one month before the contagion from
the financial crisis in Thailand hit Indonesia. The JSX ended
last week at 815.44.
The rupiah also has been fairly stable in what the central
bank often calls the comfort zone of Rp 8,200 to Rp 8,700 to the
US dollar. This has curbed inflationary pressure, giving the
central bank more room to lower its benchmark interest rate and
consequently pushing down interest rates charged by banks.
New positive factors are needed to further step up this
virtuous circle.
The 2005 state budget proposal the government will present to
the House of Representatives early next month will further
bolster market confidence in the economy if it continues fiscal
consolidation. And we are indeed glad to learn from the
preliminary figures on the basic assumptions used for the draft
budget that the government will further push forward with its
fiscal consolidation.
Minister of Finance Boediono said last week the deficit in the
2005 fiscal year would be further cut to 0.60 percent of gross
domestic product, from an estimated 1.2 percent this year.
The basic assumptions the government will recommend to the
House should also comfort the market because most of the
projections are conservative: Economic growth at 5 percent to 5.5
percent, inflation at 5 percent, interest rate at 7 percent, the
rupiah exchange rate in the range of Rp 8,400 and Rp 8,750, and
international oil prices in the range of US$21 and $24 per
barrel.
Certainly, it is not the current administration but the new
government that will have the final say regarding the 2005 state
budget. But a well-prepared and reasonable budget plan for the
new administration, which will take over only in late October,
two months before the beginning of the 2005 fiscal year, will
assure the market of a smooth transition.
Moreover, there is not much leeway for the new government to
ease its fiscal stance, for example by increasing spending on
subsidies, because of the public sector's heavy dependence on
domestic bonds with floating rates to meet its financing needs.
The unveiling of the presidential candidates in the first week
of next month could further boost the bullish sentiment if the
candidates come up with credible economic programs to guide their
economic management if elected.
It is therefore in the best interests of all political parties
and all presidential candidates to see to it that the whole
process of the legislative election, the presidential election on
July 5 and, highly probably, a runoff on Sept. 20, will be
accepted as fair and clean by the people. An election that is
seen as dirty will make the market nervous, fearful of political
instability with all of its devastating impact on the economy.