Polls reassure market

Polls reassure market

The financial market performed last week in very much the same
way as it did following the April 5 legislative election.

The Jakarta Stock Exchange (JSX) composite price index gained
more than 2.7 percent on April 6 and the rupiah strengthened
between the Rp 8,200 and Rp 8,700 band, which the central bank
then considered its comfort zone

Likewise, the JSX index jumped 3.1 percent to 768.25 the day
after what the public saw as a peaceful and fairly clean
presidential election. Similarly, the rupiah exchange rate firmed
up to Rp 9,000 from Rp 9,135 against the dollar.

If we can learn lessons from our immediate past, it is
important to note that on April 12 the JSX lost 1.5 percent on
negative sentiment. This was triggered by a joint political
statement from 19 political parties, which rejected the results
of the legislative election and demanded a repeat poll.

Upbeat sentiment returned to the market only after the protest
turned out to be a bluff, driven by politicians disillusioned
with the poor showings of their parties in the election. Many of
the parties later watered down their stance, especially after
public opinion turned against them and they were seen as bad
losers.

Whether a similar protest will emerge this time around will
depend on how the final process of vote counting proceeds during
the next two weeks.

As the experiences from the legislative election show, a
credible election process will promote confidence in the economy,
as reflected in the steep rise in the JSX index to 810.85 on
April 20, the highest level ever reached by the JSX since its
revamp in August, 1977.

The high probability incumbent President Megawati
Soekarnoputri will contest the election runoff on Sept. 20 is
likely to help assure the market that the machinery of government
can continue to run smoothly during this transition period.

However, this is not enough. The Sept. 20 runoff must also be
seen to be peaceful, clean and credible, otherwise whatever gains
the financial market has made thus far in recouping investor
confidence will disappear.

Restoring confidence is crucial to fostering economic
stability that can weather the heightened political emotions
likely to arise in the final stage of the presidential election.

While macroeconomic stability has been strengthening since
late 2001, the economy is still highly vulnerable to domestic and
external shocks. The rupiah exchange rate has lost almost 8
percent and Bank Indonesia's foreign reserves have decreased by
more than US$2.5 billion in just one month, between mid-May and
mid-June, due to uncertainty then about an imminent rise in the
benchmark U.S. Federal Reserve lending rate and the steep rise in
international oil prices to an excess of $40 per barrel.

The rupiah and stock prices did recover last month after the
Fed decided to increase its rate by only 0.25 of a percentage
point, lower than the market expected. However, the damage had
been done and the significant progress made earlier was lost. The
rupiah is now hovering between Rp 8,900 and Rp 9,100, as against
Rp 8,200 and Rp 8,700 before mid-May, with the JSX now at much
lower than the 810 points it reached in April.

We are therefore most encouraged by the central bank's
announcement last week that it will continue to focus on
controlling inflation. This commitment was made more credible
after Bank Indonesia and the government agreed earlier this month
to set up a team to implement a comprehensive inflation targeting
framework that would provide a better anchor for the public's
inflation expectations.

A better coordination of monetary and fiscal policies, as
reflected in the steady easing of the credit crunch and the
continued fiscal consolidation, is vital to maintain stability
and smoothen the transition period until the new government
elected in September begins work.

In this context, it is most important the House of
Representatives and the government accelerate the preparations
for the draft 2005 state budget because the new government would
have little time to prepare the budget from scratch.

Although the budget will still have to be approved by the new
House to be inaugurated in October, a detailed spending plan
would at least give the market an idea of the likely fiscal
direction next year, decreasing the uncertainty factor.