Preventing a crisis

Preventing a crisis

The package of measures announced after the monthly cabinet
meeting on Wednesday once again proves the crisis management
capability of the Indonesian government. It is, nevertheless, too
early to gauge the full impact of the move on the market
sentiment and investor confidence.

At first glance, the package, though short of badly-needed
efforts to abolish market distortions such as monopolistic
practices, is still commendable because it does not include
antimarket measures.

Given the track record of the government's policy-making
mechanism, we have to wait and see what the final agenda of
action will be after the internal "struggle" among cabinet
ministers, on one hand, and between ministers and politically
well-connected conglomerates, on the other.

But plans for a downward revision of the government's
investment spending -- to offset an expected decrease in
revenues--, to cleanse the financial industry of structurally
weak banks and to curb imports of consumer goods will give a
strong signal to the market that the government is serious about
tackling the currency turmoil.

These measures will prevent a budget deficit and a major
banking crisis and curb the growth of the current account
deficit.

The lifting of the limit on foreign purchases of shares at
initial public offerings (IPO) will help reinvigorate the capital
market. It will also pave the way for new IPOs in the pipeline
which have been postponed due to the depressed condition of the
stock market.

What our economy -- which most domestic and foreign analysts
still see as fundamentally sound -- badly needs now is a positive
market sentiment and strong investor confidence to prevent a new
bout of massive, wild, speculative attacks on the rupiah.

This will, in turn, accelerate the market process for the
rupiah to settle at its equilibrium rate, thereby enabling the
monetary authorities to gradually ease the tight monetary
measures.

In fact, the effect was already felt yesterday when the
central bank started lowering the interest rate on its one-month
certificate, by 300 basis points to 27 percent.

As long as the central bank's certificate rates remain above
their normal level of 8 percent to 11 percent, business
operations will remain at a standstill. A spate of business
failures would be unavoidable and many banks, hit by bad credits,
would see their asset bubble burst.

As far as retrenchment in the public sector (and state
companies) is concerned, however, the ministers have yet to
negotiate which projects should go. Rationally, projects with
large import requirements and which are not immediately required
-- such as the aircraft development program, big power projects,
the national car program, office buildings and even public
infrastructures -- must be the first to be axed.

How far the government goes with its retrenchment program and
its choice of projects to be shelved or postponed, will determine
the credibility of the government policy.

Its consistency in dealing with structurally weak banks will
also be crucial for restoring investor confidence in the long-
term outlook of the economy.

Unfortunately, the central bank has often been criticized for
being highly vulnerable to political pressure. This is clearly
reflected in the haphazard manner in which Bank Indonesia has
been tackling several problem banks over the last few months.

Minister of Finance Mar'ie Muhammad did announce that serious
efforts would be made to eliminate various constraints on
economic activity and remove the causes of a high cost economy.
Mar'ie did not provide specific details.

We no longer hear anything about the purported "great news" a
few weeks ago from Coordinating Minister of Economy and Finance
Saleh Afiff regarding the abolishment of trading monopolies in
several basic food commodities, except rice. We suspect Afiff
might have lost his battle.

We realize that the run-up to the presidential election in
March is not the best time for the government to bite the bullet,
albeit for the long-term good of the economy. But we still hope
that the government will take a good lesson from the currency
turmoil and work harder to remove the structural weaknesses in
the economy.

Further delay in the resolution of these weaknesses will
sooner or later expose our economy to an even more punitive
judgment by the market.