Sept. 22, 2004

Sept. 22, 2004
;JP;VIN;CD;
ANPAk..r..
Editorial-
Election buoys the market
JP/6/EDIT22

Election buoys the market

The financial market predictably reacted positively to the
peaceful and orderly presidential runoff, especially because the
election was perceived to be fair. While rupiah remained flat,
the stock market increased by 1 percent on Tuesday with the
Jakarta stock price index closing at 824.

This market sentiment will most likely strengthen on the back
of strong political stability, especially if both the president
elect and the losing candidate demonstrate a high degree of
statesmanship in facilitating the transition process.

The immediate impact of this upbeat market sentiment will be a
higher pace of portfolio capital inflows, which will fuel a
higher rate of rupiah appreciation and substantial rise in stock
prices.

These developments will in turn strengthen the virtuous circle
within the economy. A stronger rupiah will decrease the costs of
imports and consequently reduce inflationary pressures, thereby
enabling the central bank to decrease its interest rates. An
eased money policy will help commercial banks to cut their credit
interest rates, and more businesses will be able to afford new
loans to expand operations. Even more substantial will be the
significant decrease in the government's domestic debt-servicing
burdens, thereby releasing bigger resources for other more vital
spending such as on public services and infrastructure.

Accelerating the virtuous circle within the economy is
especially crucial now for strengthening the macroeconomic
stability during the current transition period until the October
20 installation of the new president and in facing the enormous
challenges awaiting the incoming government.

The new president hardly has any time for celebration as the
new government is immediately in for big challenges. First of
all, the new government will have to secure adequate supplies of
basic commodities and land, sea and air transportation services
to meet the seasonally high increase in market demand during the
upcoming Idul Fitri holidays in the middle of November and
Christmas and New Year holidays.

The incoming government and the House of Representatives will
also face a very tight schedule to deliberate the 2005 state
budget plan. This central government budget plan has to be
approved by the House in November at the latest to allow for at
least one month for local administrations to prepare their own
budgets.

Besides its tight schedule, the government-House deliberation
of the 2005 state budget plan will be quite tough as it will have
to encompass painful measures to ensure fiscal sustainability.
Foremost among them will be raising domestic fuel prices to cut
down on fuel subsidies, which this year alone is estimated to
balloon to about Rp 63 trillion ($7 billion) from the original
plan of Rp 14 trillion due to the steep rise in international oil
prices.

Preparing conducive political and economic preconditions for
the new fuel pricing policy will be one of the most challenging
and even delicate tasks for the new government. Managing the
economic impact and political repercussions of higher fuel prices
is never easy. In fact it was higher fuel prices that accelerated
the downfall of then president Soeharto in May, 1998.

The new government nevertheless should not even think of
another postponement in adjusting domestic fuel oil prices,
except kerosene for household use, to international market prices
as we have now become a net oil importer.

The new government has to bite the bullet because further
deferring this painful measure would erode market confidence in
the fiscal management and, yet more damaging, would damage the
credibility of the government in continuing economic reform.
Political determination to continue the fiscal consolidation is
central in the ongoing process of economic reform and is one of
the bedrocks of the current macroeconomic stability.

Hence, the 2005 budget plan should convey to the general
public, notably the market, a strong, clear-cut message regarding
the new government's fiscal policy as it will also help the
central bank design an appropriate monetary management to control
inflationary pressures.

Better coordination of monetary and fiscal policies, as
reflected in the steady easing of the credit crunch and the
continued fiscal consolidation over the past two years, is vital
to maintain macroeconomic stability, without which almost nothing
else will work within the economy.

In this context, it is therefore imperative that the House and
the government give top priority to the deliberation of the draft
2005 state budget, that was proposed in mid-August by the present
government.

_______