Premature euphoria
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.