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.