Shakily does it

Shakily does it

The country's international trade statistics for the first
quarter are bolstering the view that the economy is slowly but
steadily recovering from its deep crisis. If this trend continues
until December, the 4 percent growth target for this year will be
within reach.

This positive development is strikingly different from the
discouragingly steady decline in the Composite Index of the
Jakarta Stock Exchange and in the rupiah exchange rate that fell
to a seven-month low in recent days due to growing uncertainty
about the coalition Cabinet.

Still, the 30 percent increase in non-oil exports to US$10.75
billion from $8.3 billion in the first quarter of 1999 was
especially encouraging as it reflected a strong rebound in the
real sector.

Whereas exports were previously dominated by fisheries,
forestry products, plantation commodities and non-oil minerals,
the first quarter trade data, as compiled by the Central Bureau
of Statistics, indicated a more remarkable trend -- a strong
recovery in the manufacturing industry. This can be concluded
from the 8.4 percent expansion in non-oil imports that consisted
mostly of industrial raw materials and capital goods.

The export and import structures will dispel analysts' doubts
that the economic recovery, fueled mainly by domestic consumer
demand, would not be sustainable for long. A stronger confidence-
building indicator was the resumption of imports of capital goods
reflecting the revival of investment.

Further bolstering the export performance was the rally in
international oil prices that substantially raised total export
earnings by 38.7 percent to $14.1 billion in the first quarter
and increased the trade surplus to $2.7 billion in March.

Though inflation, as measured by the Consumer Price Index,
increased 0.56 percent in April, the trend was not alarming. Such
inflationary pressures were in fact widely expected after
the hike in electricity rates, the minimum wage, civil servants'
salaries and the price of cigarettes and high grades of gasoline.
Businesspeople should not worry that the general price increase
would stoke interest rate pressure; most analysts instead saw the
inflationary pressure as a reflection of the economic growth.

The rosy developments, however, do not provide leeway for
complacency. Despite the steady pickup, the economy is still
nowhere near out of the woods. It is still fragile, vulnerable to
sudden shocks as the mountains of corporate domestic and foreign
debts have yet to be restructured and the ailing banking industry
needs time before it can resume major lending. The volatile
rupiah continues damping investor sentiment.

The results of the current negotiations with the International
Monetary Fund about what additional reform measures have to be
taken will further influence market sentiment about economic
prospects. A strong IMF endorsement of reform implementation over
the past three months would go a long way in improving market
confidence, not only because the approval would release another
$400 million from the IMF bailout fund but because investors
could rest assured that sorely needed economic structural
programs would continue.

A host of other daunting challenges loom ahead, all inherent
with risks of social and political instability. How the
government attempts to surmount the challenges will determine
whether the economic recovery would be sustain or peter out to
lead to another crisis.

The fuel price increase, which was delayed from April, thereby
increasing the fuel subsidy by Rp 250 billion a month, should be
implemented within the next few months. A further delay in the
price hike would increase the budget deficit to an unmanageable
level and strengthen inflationary pressures.

The market is waiting nervously to see how the government will
cope with the teachers' demand for hefty salary increases.
Another development that could unsettle the market is how local
people and administrations would react to the hundreds of
regulations on the decentralization process that are supposed to
be announced next week. Still unnerving is the political
controversy over the recent firing of two Cabinet ministers and
intense political debates in the run-up to the meeting of the
People's Consultative Assembly in August.