Stability of RI's macro-economy uncertain: Econit

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)