Qualified confidence

Qualified confidence

We should not read too deeply into the remarks of optimism by
International Monetary Fund Managing Director Michel Camdessus
about the prospects of our economy. While the air of bullishness
he fanned during his brief visit here could provide a
psychological boon, we should instead focus our attention to the
key factors he cited to qualify his rosy projections. The most
important of them is the proper implementation of the reform
measures already set for stabilizing the economy and eventually
restoring it to the robust growth it had enjoyed until last year.

The first thing we should keep in mind is that all reform
measures designed to cure a sick economy initially cause a lot of
pain, especially now that we are facing unfavorable weather
conditions from a prolonged dry season. Hence, we should prepare
ourselves for worse conditions before things start to get better.
The closure of 16 insolvent banks which will soon be followed by
the foreclosure of the assets of these banks' debtors, business
failures and massive layoffs is one of the series of pains we
will feel.

We will feel the most hurtful pains next year when the
government will have to cut subsidies to achieve a budget surplus
of at least 1 percent of the gross domestic product -- one of the
bitter medicines prescribed by the IMF. This means that the price
of fertilizer, oil fuel subsidies, wheat flour and electricity
will have to be raised. This in turn will inflict a double blow
on most of us because while our purchasing power is being eroded
by the sharp rupiah depreciation and slower economic growth we
will have to suffer a higher inflation as well. Last month's 1.99
percent inflation, the highest monthly rise in the consumer price
index since January 1996, was the start of the likely price
gyrations we will experience within the next few months.

As market confidence will not likely return in full before
April -- after the March election of a new president and vice
president and the appointment of a new cabinet -- the rupiah rate
will also remain volatile, though not as wildly as in last month.
Consequently, the stock market will remain bearish and bank
interest rates will be kept way above the normal levels
prevailing last June.

The brunt of all this is that the unemployment rate will get
higher due to the combination of massive layoffs caused by the
structural adjustment and the very small number of new jobs being
created during the current slow-growth period which may last at
least until the first half of 1999. In the meantime, 2.5 million
new job seekers will enter the labor market every year.

The other bleak outlook is related to our poverty profile.
Even though the number of people living below the poverty line
has impressively been reduced to about 16 million, there are tens
of millions of others living on the brink of absolute poverty.
The sharp decline in economic growth during the next two years
will most likely push many of them down below the poverty line.

As the Pandora's box of the private sector's short-term
foreign debts has yet to be opened -- the central bank is still
taking stock of these debts and their maturity schedules -- we
are possibly in for another jolt of rupiah volatility sometime
within the next few weeks when the real debt profile is known.

Given the trial period ahead which may stretch the endurance
and patience of those who must make the sacrifices, it now
becomes more imperative than ever for the government to
consistently carry out the reform measures.

We get the impression that the government has so far been
willing to act quickly and consistently mostly on reform measures
that do not require big sacrifices on the part of its own rank
and file members and the political elite.

However, the implementation of the programs to develop good
governance -- bureaucratic reform, the removal of crony
capitalism and the transparency and accountability of the state
budget -- has remained at a snail's pace. The government and
others in the political elite seem not to have fully realized
that good governance is a key component of the economic
fundamentals and is crucial for restoring market confidence. Good
governance also becomes more urgent during this trial period for
maintaining the spirit of solidarity and optimism among those who
will suffer most from the painful adjustments.