The market remains calm

With most government leaders, from the President and Vice President on down to Cabinet ministers and other senior officials, seemingly preoccupied with campaigning for their respective political parties, the economic management of the country appears to have been running on automatic pilot over the past eight days.

However, thanks to strong macroeconomic stability and an election campaign that has so far been devoid of violence and security disturbances, the market has remained calm.

Both the rupiah and stock market did show a downward trend earlier this week but the fluctuations were moderate, reflecting mildly speculative transactions that were needed in any case to maintain market liquidity and turnover.

Bids for Rp 2 trillion (US$235.3 million) worth of rupiah bonds on Tuesday exceeded Rp 5.67 trillion, resulting in an average yield of 11.57 percent, lower than the 11.82 percent gained by similar T-bonds issued last month. The strong demand for the eight-year bonds, even with a fixed coupon rate of only 11 percent, is another indication of the market's confidence both in the government and the future outlook of the economy.

If campaigning over the next 15 days remains peaceful and the legislative and presidential elections in April and July go off without a hitch, we are confident the economy will do just fine, even if a second round of the presidential election is needed in September.

The relatively strong macroeconomic stability should be attributed to the fiscal discipline of the government and correct monetary management by the politically independent central bank.

Major political parties did increase spending on campaign activities to woo voters, but there is nothing wrong with a spending spree once every five years because the government seems able to refrain from short-term, narrow-minded populist measures. It also appears strong enough not to resort to distributing political goodies to win votes at the expense of the long-term prospects of the economy.

The fairly calm market reflected market expectations and perceptions that economic management will remain on the right track during the election year. This positive perception, in turn, was generated by market trust in the government's policy- making capabilities and its determination to push ahead with its reform agenda, as stipulated in the government White Paper of September 2003.

All this, we think, forms the automatic pilot that will guide economic activities throughout the election year.

The market also is comfortable that none of the major parties that are most likely to win a respectable number of seats in the House of Representatives have any intention of fundamentally changing the current market-based economic development. Some parties are promoting a package of economic policies they promise to pursue, but the policies by and large only fine-tune the grand economic strategy the government has implemented since 2001.

Moreover, the market trusts the monetary management of the central bank, fully assured by its anti-inflation measures and the consistency of its monetary policy to steadily lower interest rates to stimulate economic activity.

Certainly, the government should continue its fiscal discipline and push ahead with its reform agenda. Likewise, the central bank should maintain market trust in its monetary management and in the direction of its monetary policies. This is the only way to maintain the market's trust during the highly- politicized period of the elections.

On top of that, the central bank should be extra careful about developments in the foreign exchange market, and remain ready to intervene whenever necessary to beat off excessive speculative activities aimed at pushing down the rupiah.

It is, we think, crucial for the central bank to maintain the rupiah at what it likes to call the comfort zone of Rp 8,200 to Rp 8,700 to the dollar. This range is considered conducive for maintaining the price competitiveness of exports, yet not too low as to induce inflationary pressure from imports.

It would be understandable if the pace of reform slackened a bit as most members of the House were preoccupied with election campaigning. That is simply expected in a country engaged in a general election.

But as long as policy consistency and the fundamental elements of macroeconomic stability are maintained, the economy will be able to weather the upcoming period of heightened political emotion.