Stronger market trust

Stronger market trust

It is now almost seven weeks since the government has managed
the economy without the direct supervision and balance-of-
payments support from the International Monetary Fund; and market
trust in both fiscal and monetary management has increased
steadily.

This positive development can be seen in the steady
appreciation of the rupiah and the reduced volatility of its
exchange rate. The stronger rupiah has, in turn, lifted
inflationary pressures from imports, thereby enabling the central
bank to keep inflation within target and to continue lowering its
benchmark interest rate.

Inflation declined to a mere 0.57 percent in January, from
0.80 percent a year earlier and 0.94 percent in December. The
benchmark interest rate also continued its downward trend to as
low as 7.66 percent last week, from as high as 8.3 percent in
early January. The Jakarta bourse also continued its rally,
raising its composite price index to over 767, the highest in the
past seven years.

These developments reflect market expectations and perceptions
on economic prospects this election year. Positive perception was
also generated by market trust in the government's policy-making
capability and determination to push ahead with its reform
agenda, as put forth in the White Paper of September 2003.

The government seems to have been able to remove any earlier
doubts the market had over its ability and discipline to continue
the reform agenda after the end of the IMF-funded program in
December. The market has been deeply impressed by the
government's high fiscal discipline, despite the great temptation
to introduce populist programs with a short-term aim of gaining
voter support.

President Megawati Soekarnoputri and her Cabinet pledged early
last month that this year, the government would focus on
bolstering economic growth, maintaining the pace of reform,
attacking poverty, facilitating smoother distribution of goods
and preparing the draft 2005 state budget for the new government
to be installed in October. These are, by and large, the policies
it has followed thus far.

The market also seems to have more confidence in the monetary
management of the central bank, with a full trust in its anti-
inflation measures and in the consistency of its policy to lower
interest rates to stimulate economic activities. The central
bank's monetary policies have thus gained market credibility.

This virtuous circle will continue -- provided the government
maintains high fiscal discipline and pushes ahead with the reform
agenda. Likewise, the central bank should nurture the current
market trust in its management and policies. These are the only
ways of maintaining market trust in the government and its
economic policies this year, with elections looming.

The government should therefore not be swayed in any way by
the pressures from narrow-minded and short-sighted lobbyists and
analysts who are firing up inordinate nationalist sentiments and
xenophobia, demanding that the privatization program be stopped,
pending the installation of a new administration in October.

The privatization and divestment of the banks that were
nationalized at the height of the banking crisis from 1998 to
1999 are not only central to achieving fiscal consolidation and
cutting the budget deficit, but are vital to reform and
establishing good corporate governance. Any signs of backtracking
on these measures would erode the credibility of the government's
commitment to reform.

Privatization will bring in additional revenues to the cash-
strapped government to help it cut down debt burdens, thereby
making it possible to release more resources toward public
welfare. Privatization is also greatly effective in improving
macroeconomic efficiency through the creation of a more
competitive market. On top of all this, its microeconomic
benefits are manifold, including more efficient and thus, more
profitable, enterprises, higher tax revenues and a significant
increase in investment to spur job creation.

State companies, even after privatization, will be subject to
Indonesian laws and regulations and must follow the policies of
each economic sector.

What is needed, though, is for the government to set out and
implement a credible strategy for privatization and clear-cut
directives, standard operational procedures and a step-by-step
divestment process to ensure that transactions are highly
accountable and transparent.

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