Sound indicators
The robust, key economic indicators announced after the monthly cabinet meeting last week, when the Asian financial situation plunged into turmoil after the floating of Thailand's baht, served to further reassure both domestic and foreign investors of the sound fundamentals of Indonesia's economy. This development is especially welcomed as East Asia's financial market is expected to remain volatile in the next few weeks as businesspeople assess the impact of the baht flotation.
The speculative attacks on the Philippine peso yesterday, which analysts considered the fallout of the baht de facto devaluation, could affect other currencies in the region, especially in countries perceived to be facing similar problems to those in Thailand.
But the sound economic indicators could serve as a deterrent to such wild speculation. Minister of Finance Mar'ie Muhammad was not exaggerating when he told Asian and European businesspeople yesterday that the rupiah remained strong and stable despite East Asia's recent market turmoil.
Indonesia posted the year's second deflation of 0.17 percent last month, bringing down the inflation rate for the first half to 2.54 percent from 4.03 percent a year earlier. Total foreign exchange reserves increased to US$21.8 billion which is equivalent to 5.5 months of imports. The trade surplus in April more than doubled to $590.5 million from $243.3 million in March. The only sour note was the slim rise in non-oil exports to $4.1 billion in April from $4.06 billion in March.
The low inflation gives the central bank more leeway to slightly ease its monetary policy which could lower interest rates and consequently fuel a higher pace of economic activity. But this measure is not enough, especially given the weakening competitiveness of most Indonesian major export commodities and the widening current account deficit.
The large foreign exchange reserves are reassuring, especially amid the uncertainty of investors which is likely to prevail until Thai monetary authorities decide on the most appropriate exchange rate band for the baht.
The problems of the widening current account deficit and slackening export growth are actually two sides of the same coin. The deficit could reach a dangerous level if the export growth remains as low as the 3 percent (on annual basis) in April. The trade surplus that month would not have been so large were it not for the decrease in imports, a trend which cannot be sustained if direct investment is to be stimulated.
It is in this light that the latest reform package announced early this week should be welcomed because many of the new measures were designed to cut what is notoriously known as "the unusually high cost of doing business", which is caused either by excessive red tape and policy inconsistency or bureaucratic corruption.
The latest package further reassures businesspeople that the process of economic and bureaucratic reform is still going on and this is the right signal for foreign direct investors.
The competitive edge of our exports is now being eroded by exports from new competitors. Recent international trade statistics, for example, show that the U.S. has been importing increasingly from Latin America and China while an increasing amount of European imports comes from Eastern Europe.
Even among East Asian exporters, Indonesia needs to move up the value-added ladder to remain competitive as new suppliers with lower labor costs such as those in South Asia, China and Vietnam are making Indonesian exports of light industrial goods less competitive.
But the current structure of incentives and domestic market competition, the legal framework and quality of physical and soft infrastructure are no longer adequate to stimulate the growth of higher value-added industries.
It is hoped the next reform package will go deeper to cope with what many analysts see as politically sensitive areas such as marketing controls, cartels, abuse of market dominance by certain groups and ad hoc instruments in certain industries.