Rupiah -- one year after its float

This is the second of two articles prepared on the basis of former Bank Indonesia (BI) governor J. Soedradjad Djiwandono's address at a luncheon organized in Jakarta by the Indonesia Australia Business Council on Aug. 11.

JAKARTA: After some flip-flop implementation of the IMF- supported program with a record of four letters of intent in seven months and the social unrest spearheaded by continuous student demonstrations, the confidence problem was shifting to the national leadership, not just the economy.

When former president Soeharto was still in power, the question was in his sincerity in implementing the difficult program. Actually, the closing of the 16 insolvent banks was lauded by the market, the foreign market in particular. But domestically, the closing of banks was badly received. It even caused a further loss of confidence in the banking system. And when some intervention by the government on the execution of the decision on bank closures was suspected, the foreign market started to react negatively. This basically transformed the banking sector from a state of distress into crisis when market confidence was almost completely lost.

The negative reaction on the implementation of the program was more pronounced when some reversal of the decision on the postponement of a number of big government projects was announced, plus the reappearance of monopoly practices and several other inconsistencies in the implementation of programs for restructuring the real sector. This was how the market confidence in the government commitment to the program for economic restructuring evaporated.

As a result, the rupiah's downward slide was not just difficult to stop, but the economic crisis was rapidly shifting into a total crisis in a downward spiraling process. Soeharto had to pay dearly for not addressing the problem straight on by resigning in humiliation on May 21, 1998.

In close to three months after his unexpected elevation as the new president, B.J. Habibie has been surprising many people as a national leader who has been trying very hard to do and say things that are politically correct.

He has made some success on this score. But has he been successful in eliminating the loss of confidence in the national leadership to be able to lead the government and the nation to implement the national program of restructuring the economic and political lives in Indonesia? Well, maybe, raising this question at present is a bit unfair. On the other hand, so many problems Indonesia is presently confronting cannot wait for the right solution.

Despite the good publicity that President Habibie has been receiving so far, the market has not been impressed with his leadership. Economic problems have not been abating.

In fact, statistics on macroeconomic indicators have shown a gloomier picture in terms of the growth prospect of the gross domestic product (GDP), the inflation rate, the budget deficit, the situation for food and other basic commodities. The rupiah has been strengthening somewhat, possibly due to some encouraging news about the US$8 billion loan for fast disbursement from the Consultative Group on Indonesia (CGI) recently.

But the bad news from Japan and its implication for Asia, and the still unclear government position about some social issues, seem to cause a lukewarm attitude of the market so far. Investors and creditors keep saying that they still want to wait for the social and political situation to return to stability first before they are willing to invest in or lend to Indonesia.

They trust the long-term potential but (want to) wait for some time before resuming their activities in Indonesia.

In other words, despite the good public reception on some statements or steps that President Habibie recently made, questions are still being raised on whether he is sincere, on whether he can deliver.

After a year of distress and crisis, the Indonesian economy at present has not seen the light yet. Statistics of economic indicators are difficult to hold on to because of so many uncertainties.

However, some available macroeconomic indicators show a somber economic picture which promises to get worse before getting better.

The turmoil in the last 12 months has resulted in a drastic slide of almost all economic activities.

Some data released recently by the Central Bureau of Statistics showed that the annualized economic contraction for the first semester of 1998 was a little over 12 percent. And for 1998, it will be more than 13 percent.

The inflation rate for 1998 will be more than 80 percent, unemployment 17 percent and the number of the population living below the poverty line will increase from 22 million to 80 million. The rupiah has depreciated by more than 80 percent since July last year, or more than 20 percent since President Habibie took charge, while the budget deficit will be ballooning.

The crisis has hit the Indonesian economy so hard that, after a year, the economy has turned from continued high growth with a stabilizing tendency into a slump.

The picture of the Indonesian economy at present is not very clear, confusing for many, and frustrating for those who are interested in contributing to finding a solution to the pertaining problems.

Indonesia has been suffering from a problem which initially was clearly a currency or an exchange rate problem, but through time and the contagion process, has become a economic, social and political crisis.

As mentioned before, the crisis that the national economy has been confronting in the past year has become so complicated that one may have difficulty in separating the causes from the consequences.

However, it is crucial that Indonesians should recognize the problems clearly before pursuing a program to address the problems effectively.

To get the economy back to normal, Indonesia has to be out of the crisis first. However, to be able to get out from the crisis, it has to have a clear picture of the whole problems, the link between one particular sector and the others, including politics.

This does not mean that everything has to be done at the same time, since it is impossible to solve all the problems simultaneously. Some priority has to be made to plan the path for recovery.

Faced with a crisis originating from a contagion process, time is of the essence, the sooner the better. The sooner the problems are recognized, the sooner Indonesia will come up with good programs, and the sooner it has a good implementation -- and hopefully helped by a touch of luck -- the better will be the chance for success.

Granted that a promise for political reform could lead to some state of stability, economic programs for recovery will have to include steps to address the following problems.

* Disciplined implementation of IMF-supported programs. With the four letters of intent, a much better understanding between the government and the fund seems to prevail. A commitment for no backsliding program implementation from the government and a more adaptable attitude from the fund would be helpful.

* More consistent steps on the implementation of the banking restructuring program, for the insolvent, the weak and the healthy banks.

* Consistent follow-up steps on solution to corporate debts and banks' debts, including trade financing and money line facility.

* A fiscal and monetary stance which could support the restructuring programs without constraining stability.

* Steps to revive export and tourism activities. At the time that foreign investors are still taking the "wait-and-see attitude", campaigning for tourism does not have to wait.

These steps could be taken smoothly, provided that a progress has been made on addressing the more immediate problems of food supply and food distribution. The basic problem here is how to maintain the availability and affordability of key commodities important to the poor.

With respect to the supply problems, the foreign commitments through the CGI and others have to be consistently implemented.

But, on the distribution problems, the government has to realize the seriousness of the damage of the distribution system due to the burning, looting and raping, particularly against the Chinese.

The fact that so many ethnic Chinese fled the country, taking along their capital, has been very damaging to the distribution system due to their prominent role in this business.

Without some assurance about their safety from the government with its security forces, it seems to be unrealistic to expect them to come back and resume their businesses. The government program to enhance the small businesses and cooperatives will take time, if it is implemented effectively. We do not see any problem to design a reservation scheme to create a better balance for a more sustainable business climate in Indonesia in the future, encompassing all potential in a competitive market.

But the linchpin of all the above issues is still the stability of the rupiah at a reasonable rate.

Some progress has been made by the government in addressing the pressing problems, but the market keeps waiting to make any positive move. This actually means that somehow "a turnaround" still has to come before the market players -- the buyers, investors and creditors -- are willing to give positive responses to the development of the Indonesian economy.

The positive response from the market has to be preceded by a positive perception, which has not come out yet. Positive perception could come when market confidence is back.

John Maynard Keynes showed 62 years ago the importance of confidence in an investment decision, aside from marginal efficiency capital.

However, it is difficult to define what confidence really means. Indeed market confidence is crucial. Confidence is very difficult to describe. When the confidence is present, the market is not very demanding. However when it is lost, everything done is not good enough -- the market is extreme.

The turnaround has to be produced by the government by showing the market how the government views the whole problems facing the country and a credible program to be implemented. This has to be done to get public support for the implementation of the program.

Most important is to change the negative perception of the market -- in other words, to get rid of the confidence problem, to change the market's wait-and-see attitude -- to become positive. After that, a consistent implementation of the program, plus hopefully that touch of luck, and the long path toward recovery could be assured.

Window: Indonesia has been suffering from a problem which initially was clearly a currency or an exchange rate problem, but through time and the contagion process, has become a economic, social and political crisis.