The economic outlook

The economic outlook

Though all key economic indicators have, of late, been showing
a marked improvement, never, over the past 30 years, have we been
as worried as now, facing a new year with so grave a sense of
foreboding about our future. We are leaving a year of political
turbulence, increasingly frequent civil strife and economic
depression, only to enter a new year pregnant with uncertainty in
almost all aspects of our life.

The political uncertainty that has been looming since the fall
of Soeharto in May seems to make economic projection and analysis
rather irrelevant. As most analysts noted in this paper's year-
end economic review, whatever realistic assumptions are made,
they will ultimately be determined entirely in the political
field: whether the general election in June and presidential
election later next year will take place peacefully. And, more
importantly, whether the election outcomes will be gracefully
accepted by the losing and winning parties, to allow for a smooth
transition to a new government with credibility and legitimacy.

What all this implies is that no new private investment,
either domestic or foreign, will likely be made until 2000, while
public sector investment is out of the question as the state
budget will continually be preoccupied with subsidies, social
safety net programs, food security, the costs of bank
restructuring and other operating costs. Virtually all foreign
capital flows will be foreign-aid funds to fill the big state
budget hole and finance various restructuring programs.

But not all things in the economy look so gloomy. Barring a
new bout of massive violence and political conflicts, the
economic outlook next year should be much better than this year,
when the economy is projected to contract by between 13.5 percent
and 15 percent, meaning a decline of about 20 percent from last
year's growth of about 5 percent.

The most promising businesses remain those based on local
resources, such as food crops and other agrobusinesses (fisheries
and tree crops) and mining, barring any security disruptions by
people who have been increasingly demanding a fairer share of the
wealth extracted from their areas.

Official estimates put next year's economy at a plus or
negative growth of 1 percent, though private analysts are more
pessimistic, foreseeing a contraction of up to 5 percent. This
means economic suffering will prevail, though with much lesser
pains. Not many new jobs will be generated but no new massive
layoffs will occur either.

Similar to the situation this year, most developments in the
economic field remain contingent on the rupiah's exchange rate.
Fortunately, the rupiah has been stabilizing at around Rp 7,500
to the dollar in recent weeks, compared to as high as Rp 15,000
last June. Though the appreciation has been attributed partly to
government intervention into a very thin market, currency
stability at the current level is a key to checking inflation at
the target range of 15 percent to 20 percent, as against 76
percent this year. Controlled inflation is, in turn, crucial for
further lowering bank interest rates from their current level of
more than 40 percent.

Provided the bank recapitalization program runs according to
the prescribed schedule, lower interest rates will reopen the
credit taps which have virtually been closed since early this
year. Lower costs of capital will enable more export-oriented
enterprises to raise production rates, and the ones currently
hamstrung by the punitive costs of funds to resume production.
However, industries that depend entirely on the domestic market
will remain on a tightrope due to the depressed purchasing power
of most consumers.

The capital market will get a slight boon from declining
interest rates, though trading activities will remain weak and
limited to the bluest blue chip companies in the virtual absence
of foreign investors. This sector will still not be able to
resume its function as an alternative source of capital to fuel
economic operations. Foreign credit lines will also remain frozen
until the restructuring of the huge corporate foreign debt
overhang.

So, all in all, not much will really happen in the economic
field next year as new investment decisions will be put on hold
until a new government is in place. The top priority for those
still in operations is to survive.