Sound indicators
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.