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.