Springtime in economy

Indonesia's economy still contracted by 10.34 percent in the first quarter of this year compared to the same period in 1998 but improved markedly with a 1.34 percent expansion from a negative growth of 19.5 percent in the last quarter. Other key indicators also show encouraging signs of improvement. Inflation declined for the second consecutive month with a 0.68 percent drop in April, compared to the 0.18 percent deflation in March.

Punitive high interest rates, which crippled both banks and businesses, are on a downward trend. The central bank's benchmark interest rates have declined steadily to as low as 31.47 percent this week from 36.50 percent in January and from as high as 70 percent last October. Net foreign exchange reserves were a comfortable US$16 billion, well above the International Monetary Fund's set minimum target of $14.3 billion.

The Jakarta Stock Exchange index has strengthened to its highest level since its collapse hit a low of 276.15 in September 1998. The composite index rose to over 588 one day this week on the back of strong foreign buying before ending the week at 575.11.

Most importantly, the rupiah -- its the crash in August 1997, was largely responsible for triggering the current economic crisis -- broke the psychological barrier of Rp 8,000 to the American dollar and closed the week at 7,800-7,900. The currency hovered between Rp 8,600 to Rp 8.900 over the last few months after recovering from its low of Rp 17,000 last July.

The problem of US$65 billion in non-bank corporate foreign debt which has virtually closed the international financial market to Indonesian companies, is being addressed more aggressively. This is from the realization that businesses will remain under the grip of paralysis without the return of foreign confidence.

State-owned PT Danareksa finance company made the first break out of the impasse with a $196 million debt-restructuring deal last month. Until a few months ago, almost all debtors had simply laid back and stopped servicing their debts. Many of them are now dealing with foreign creditors in good faith and several major debt-restructuring agreements involving such big groups as Astra, Bakrie & Brothers, Polysindo and Mulia which covers more than $5 billion are in the pipeline.

The massive bank reform, though still dogged by power politics, got a sorely needed infusion of foreign confidence last month when Standard Chartered Bank bought 20 percent of Bank Bali. The deal will give the United Kingdom bank the option to immediately take over full control of the management and the majority ownership within five years.

The only big disappointment is export, the main locomotive expected to drive economic recovery. Non-oil exports, though up by 10.23 percent in February, suffered a 22.06 percent decline on a year-to-year basis for the first two months (compared to the same period in 1998). A shortage of trade financing due to the lack of foreign trust in Indonesian banks, which are mostly crippled with negative capital, has deprived manufacturers access to imported input. Foreign buyers, worried about delivery schedules due to security disturbances in several areas, seem to have diverted orders to other suppliers.

That said, we are still far off the path of sustainable recovery. However encouraging this springtime seems to be, big turbulences still loom ahead, threatening to destroy the budding confidence.

Obviously, a sustained recovery still hinges primarily upon a smooth general election on June 7 and the election of a credible government later this year. Anything less than this would again lead the economy back into an abyss. But a credible government by itself will not be sufficient to spur the economy however vital it is to restore political stability, security and order, and to sustain international aid flow.

Continued reform measures are no less crucial for restoring full confidence in the long-term prospects of the economy, especially now when the country is so strapped for both foreign aid and capital. Most imperative is an accelerated pace of the bank and foreign and domestic debt restructuring. Without significant progress in these areas, no foreign investor will likely come, most businesses will remain closed to new domestic and foreign credits and exports will continue to be stifled by lack of imported inputs.