Rupiah -- one year after its float

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.