Springtime in economy

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.