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.