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.