Smooth election unlikely to spark boom: Economist

Rendi A. Witular, The Jakarta Post, Jakarta

A smooth general election process is unlikely to lead to a reduction in Indonesia's risk premium nor mark the beginning of an economic boom, global financial advisor Morgan Stanley said.

Daniel Lian, Southeast Asia chief economist for Morgan Stanley, said that the new government and lawmakers would face a daunting task in addressing a number of economic problems, as the Indonesian economy suffered from unfavorable trends and negative dynamics.

"They (global investors) believe a smooth election process will dramatically improve Indonesia's macro (economic) outlook, while an undesirable result could make things worse. We believe that is a rather naive view," said Lian in a seminar on Tuesday.

In his report, Lian said that Indonesia's economic growth remained unimpressive and unbalanced although the economy had recovered relatively from the 1998 regional financial crisis.

He explained that Indonesia's cyclical prospects were stable but not outstanding because the country, based on a Morgan Stanley forecast, would only grow by 4.5 percent this year, well below the 7.3 percent and 5.7 percent forecast for Thailand and Malaysia respectively.

Indonesia's economic growth was also unbalanced as it remained largely dependent on private consumption, which accounted for 88 percent and 84 percent (estimate) of the country's growth in 2003 and 2004 respectively.

In the case of Thailand, robust private consumption over the past two years was slowly being replaced by strong private investment and exports. In Malaysia, big government spending was being replaced by stronger private investment fueled by small and medium enterprises growth and export expansion.

Lian said that exports had failed to emerge as a major growth engine in Indonesia, and it had become increasingly tied in to demand from China.

"A slowdown in the Chinese economy ... will hurt Indonesia relative to its peers in Southeast Asia," said Lian.

Lian also emphasized the limited fiscal options open to the government to salvage the economy in the event of a dramatic decline in global demand and rising interest rates, as the country continued to adhere to the extremely prudent fiscal environment inherited from the International Monetary Fund.

Lian said that effective economic leadership and a well- thought-out pro-growth development strategy were the keys to improving the country's long-term economic future.

He also said that policymakers must establish a long-term development blueprint that included two key features; first, carrying the debt burden -- instead of rushing to pay it down, trade it for faster and more even and equitable growth; second, Indonesia must develop its own indigenous economic development model that accorded with local conditions.

Based on the Morgan Stanley estimate, Indonesian gross domestic product (GDP) in 2004 would finally recover to its pre- crisis level. But in per capita terms, recovery might only be achieved in 2005.

However, the recovery still lacked substance as poverty levels, wealth and income distribution had not improved much, and the unemployment and underemployment rates had risen.

Ruster

SBY-Jusuf duo vows to boost local investment

Vice presidential candidate Jusuf Kalla has pledged to encourage stronger domestic investment to help improve the country's economy rather than depending on foreign investment inflows.

"Our focus for improving the country's economy is to empower local economic players in a bid to replace dependency on difficult-to-find foreign investment," said Kalla during a seminar held by Morgan Stanley on Tuesday.

Kalla has paired up with the Democratic Party's presidential candidate Susilo Bambang Yudhoyono for the upcoming presidential election on July 5 and a possible run-off on Sept. 20. According to the polls, the Susilo-Kalla pairing is ahead.

Kalla, who recently resigned from his post as coordinating minister for people's welfare, said that one of the ways to encourage domestic private investment was to boost government spending on infrastructure.

He said that there were several concrete steps that could be taken by the government to bring this about, including issuing bonds to finance the development of toll roads, ports and telecommunications networks.

"A boom in domestic investment may be expected to reduce the country's high unemployment rate," said Kalla, a businessman turned politician. -- JP