Premature euphoria
Economic ministers have of late been congratulating themselves on the remarkable signs of economic improvement over the last two months, especially after the peaceful parliamentary elections in early June. Given the presidential election in November, the timing of the bullish indicators couldn't be better for supporters of President B.J. Habibie, who are already campaigning for his second tenure. They were, predictably, quick to capitalize on the situation, touting the impressive economic indicators as a market vote of confidence for the Habibie administration.
Chief economic minister Ginandjar Kartasasmita declared that recovery is already underway. He foresaw economic growth much higher than the 0.13 percent predicted by the Central Bureau of Statistics for the whole year, compared to a contraction of almost 14 percent in 1998. Bank Indonesia Governor Sjahril Sabirin was equally bullish, predicting a single-digit inflation rate, as against 78 percent last year, interest rates below 17 percent, down from 35 percent in January, and a rupiah range of Rp 6,000 to Rp 6,500 to the U.S. dollar. The composite index of the Jakarta Stock Exchange, which fell to as low as 393.62 in March, is now hovering above 655. The financial market seems to believe that the worst is over and the economic crisis has bottomed out.
However welcome and essential are the signs of recovery for confidence building, especially for the beleaguered business sector, the high sense of euphoria is still premature. The more damaging it would be to the incipient recovery if the bullish sentiments prompted an easing of the implementation of painful reform measures. As core problems remain and the fate of the economy is being held hostage to the outcome of the presidential election in November and the credibility of the new government to be formed in December, it is doubtful whether the budding recovery will hold.
Problem is indicators from economic fundamentals are not heartening. Exports for the first five months were down more than 10 percent from the same period last year, despite the 65 percent depreciation of the rupiah. Imports in the same period decreased 13.3 percent, indicating persisting low capacity utilization at most manufacturing plants.
Direct investment is a far more important indicator of recovery than the upbeat trend in the highly speculative financial market. Unfortunately, new direct foreign capital inflows are still negligible. Except for new small investments and foreign acquisition of some assets, such as Standard Chartered Bank's investment in Bank Bali, foreign investors do not appear eager for local assets offered by the Indonesian Bank Restructuring Agency. This is quite disappointing because assets in the country should be the cheapest in Southeast Asia now, given the almost 65-percent depreciation of the rupiah against the dollar and the 78-percent inflation last year. Asset purchases by foreign investors in Thailand and South Korea have been very much part of the fuel that generates economic recovery in the two countries.
The major hurdles to new direct investment in Indonesia are quite obvious. The uncertainty about law enforcement and the upcoming transition to a new government has made the risk of investing in the country unusually high.
Other major barriers to the recovery process are the agonizingly slow pace of the bank restructuring and resolution of the US$70 billion in corporate foreign debts and Rp 235 trillion ($34.5 billion) in bad debts of domestic banks.
As long as these problems are not resolved satisfactorily, exports will remain hindered by a lack of trade financing as most foreign banks will continue to shun Indonesian companies. Domestic banks will also have difficulty finding viable businesses to finance if the huge bad debt overhang is not resolved. Since the almost 1,700 bad debtors, currently being treated at the IBRA 'hospital', are themselves the main players in upstream and downstream manufacturing industries, the real sector will remain virtually moribund, deprived of working capital, and the economic fundamentals will remain on shaky ground.