Stability of RI's macro-economy uncertain: Econit

JAKARTA (JP): Uncertainty over the stability of the Indonesian macro-economy is likely to remain a major issue until the end of year due to a lack of effective measures taken by the government to reduce the country's current account deficit.

Econit's Economic Update, a mid-year review issued yesterday by Indonesian consultants the Econit Advisory Group, said that macro-economic stability, which has been clouded by the current account deficit since last year, is now getting even worse with the government's inconsistent policies aimed at cooling down the economy and promoting investment and trade.

Econit said in the review that the current account deficit, which is estimated to reach US$7.5 billion this year, will continue to threaten macro-economic stability.

The review said that 1996 should be a year of consolidation both in the macro-economic sphere and the corporate sector, in a bid to cool the economy and to anticipate a foreseeable boom next year.

"It will only happen if the monetary policies are in line with fiscal policies, meaning that both should be contractive."

"Several monetary policies have been able to cool down the economy. Some deregulation packages in the real (trade and production) sector, however, fail to support the consolidation process," the review said.

"Ironically, the government policies in the real sector, such as the national car program, are contradictory and tend to widen the current account deficit."

Econit acknowledged that monetary policies, such as the increase of the capital adequacy ratio and reserve requirement of commercial banks, which came into effect last February, as well as the tightening of multi-finance companies' credit expansion, have helped curb credit expansion and increase banks' liquidity since early this year.

But the government's 1996/7 budget plan is not counteractive and not supportive of the consolidation process.

The review said that the deregulation packages issued by the government in January and June have attracted more foreign investments. Most of the investments do not go to export-oriented projects as expected. it said.

The proportion of export-oriented projects among foreign investments declined from 64 percent in 1994 to 57 percent in 1995. During the first quarter of this year, the percentage was recorded at only 43 percent -- the lowest figure in the last five years -- as compared to 86 percent in the same period of 1994.

"The upward trend of foreign investments aimed at the sales of products on the domestic market will widen the current account deficit in the future," the review stated.

The review also noted that the realization of both domestic and foreign investment plans is very disappointing this year despite a dramatic increase in the amount of investments approved.

During the period of Jan.1 to May 15, domestic investment plans rose 145 percent to Rp 59 trillion ($25 billion) over the same period of last year, while foreign investment plans increased by 14 percent to $18 billion.

The realization of domestic investment plans in the first 4.5 months of this year, however, was estimated at less than Rp 20 trillion, while the realization of foreign investment plans was less than $5 billion.

The low level of realization indicates investors' suspicion of the investment climate in the country due to several discriminative policies as well as inefficient bureaucratic procedures.

Econit also pointed out that the increase in the amount of domestic investments is not matched by an increase in the number of investors, as reflected by the number of projects, which increased by only 13 percent for the first 4.5 months of this year.

It suggests an economic structure which is dominated by a few groups.

On portfolio investment, Econit estimated that the Jakarta Stock Exchange will be stagnant in the second half of this year for several reasons. Most stocks, for example, are now fully- valued, meaning that investors can no longer make capital gains.

The widening current account deficit will also increase investment risks from the macro-economic point of view. Therefore, investors are likely to shift their funds to other markets which offer lower risks. (alo)