RI needs more than luck

RI needs more than luck

David Sumual, Analyst, Danareksa Research Institute, Jakarta

The Indonesian economy has seemingly taken advantage of a
number of positive global crosscurrents recently. The impact of
SARS nationally is minimal so far. Given Indonesia's close
proximity to Singapore, the Philippines and Malaysia (that have
been hit hard by the disease), a measure of luck is the only
thing to credit for the country's incredibly low incidence of
SARS.

One more thing, the SARS phenomenon gives a valuable learning
outcome for global investors that benefit Indonesia. SARS may
cause investors to vigilantly rethink their investment
strategies. Business executives realized that concentrations of
investment in any one country, such as in China, is always risky.

This imminent new investment strategy has been accentuated by
the statement of the Japan External Trade Organization (Jetro)
that plans for a high-profile Japanese business mission to
identify investment opportunities in ASEAN, including Indonesia.

Meanwhile, it appears that the escalating conflict in Aceh
would only have a minor impact on the economy as the Indonesian
economy is historically immune to tensions in this restive
province. Aceh's economic contribution to Indonesia's gross
domestic product was only 2.44 percent in 2001.

Aceh was the fourth largest producer of oil and gas as only
10.4 percent of the country's 2001 oil and gas output was
obtained from Aceh. Instead, with the additional Rp 1.23 trillion
recently-approved boost in military spending (the funds will be
taken from the 2003 state budget reserve), the massive operations
in Aceh may further stimulate the economy.

Another blessing in disguise for Indonesia is the reality that
the weakening US dollar has put the country's inflation under
control. Following a statement by the U.S. Treasury Secretary
John Snow that Washington would tolerate a weakening of the
dollar, the rupiah as well as most Asian currencies strengthened.
As such, we can expect a new round of deflationary pressures that
give leeway to the central bank to cut Bank Indonesia Certificate
rates to below 9 percent by the end of 2003.

These current developments may have some policy implications
for Indonesia. Actually, a weaker dollar should reshape
Indonesia's trading strategy. With currently about 18 percent of
Indonesian exports going to the U.S., Indonesia counts on only
U.S. economic development -- what a risky strategy.

In order to hedge risks, Indonesia should look at other
markets like those in Europe and Japan that now have more buying
power or markets in Latin America, the Middle East and Eastern
Europe that have not been fully explored. Of course, it does not
mean that Indonesia must pull the rug out completely from the
U.S. market.

Indeed, in the near term John Snow's policy to fight the trade
deficit would face the innermost challenge from the China low-
cost powerhouse (in the first three months of this year, the U.S.
still ran a $24.67b trade deficit against China). Moreover, China
has fortified its economic barricade by its yuan's peg policy. In
the longer term, John Snow's policy may, however, help stimulate
U.S. growth and Indonesia should thus prepare for reinvigorated
demand from the U.S.

Nevertheless, Indonesia cannot continuously depend on the
accidentally positive global crosscurrents or luck. The people in
charge should have a fresh idea to cope with the currently rising
unemployment. Most people do not care whether GDP growth is 2
percent or 5 percent; what matters to them is whether they can
find jobs and keep spending.

Unfortunately the job situation is increasingly dismal. The
unemployment rate has reached 9.1 percent in 2002, signifying
that Indonesia is currently experiencing a jobless recovery, in
which GDP is growing but employment isn't.

To improve the standard of living, the economy needs higher
productivity, not only in order to be more competitive in the
global economy but more importantly to produce more. The
government should also take the opportunity of currently
encouraging developments to expedite the resolution of persistent
problems facing investors.

Meanwhile, Bank Indonesia must also continue to introduce easy
money bias policies to push money out into the real sector. Both
the government and BI should act fast to tackle the currently
weakening purchasing power that is likely to hurt the current
spending spree.

Meanwhile, Indonesia's citizenry has been sick and tired of
complaining about corruption and poor law enforcement. People saw
an unfair policy when conglomerates got off the hook and the
public had to bail out all of them without any guarantees that
those who stole state money would never do it again.

However, the establishment of the long-awaited special court
to hear corruption cases shows at least a first step of political
will that the government is serious about combating corruption.

Given the nascent freedom of the press, the current ruling
parties (the Indonesian Democratic Party of Struggle and the
United Development Party) must be really careful since any
unresponsive measures by the government would have real
consequences for them in the upcoming elections.

Money politics will not work effectively in the upcoming
elections. Trillions of rupiah would not be enough to bribe
nearly 100 million voters. The current government's
accountability instead will be fairly judged by its performance
to open new job opportunities and not only by its promises.