The market remains calm

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.