The rock and the hard place
JP Morgan Chase & Co. foresees the rupiah appreciating to as strong as 8,500 against the US dollar later this year, from 9,100 last week, on expectations that Indonesia's economic growth will accelerate next year. The Fitch and Standard & Poor's rating agencies are equally bullish about Indonesia's economic outlook, upgrading the country's credit rating on the back of strong political stability. The Jakarta stock market has also been increasingly bullish.
These positive developments are the early benefits of the orderly and peaceful presidential election and the overwhelming victory of Susilo Bambang Yudhoyono, who is widely seen as the more capable leader for bringing the nation out of its economic doldrums.
However, despite his strong political mandate, and even though Susilo will inherit a more stable Indonesia with stronger political and macroeconomic stability than the turbulent situation Megawati Soekarnoputri took over in mid-2001, the new president will immediately face formidable challenges requiring painful reform measures.
In fact, given the dire economic condition he is facing and the people's expectation for immediate, concrete results, Susilo will find himself squeezed between a rock and a hard place.
While some populist measures may be necessary during his honeymoon period, which will be very short indeed, Susilo will not have any leeway for dispensing political goodies or business favors. Most of the measures on his agenda of the most pressing problems confronting him during the first three months of his administration will require further sacrifices from the people and even his campaign team
First of all, Susilo may have to disappoint most members of his core campaign team who are hoping for political appointments or are expecting business favors in return for their hard work or contributions. Since Susilo has imposed very tough requirements on his working team -- including integrity, proven ability and expertise -- he may have to recruit from outside his inner circle for most of his Cabinet ministers.
The new government will have to work fast with the House of Representatives, which has vowed to put the government under a tough system of checks and balances, to complete the 2005 budget for implementation in January. And since global oil prices are not likely to fall below US$40 per barrel throughout next year, and will surely remain much higher than $24 per barrel -- the average price originally assumed for the next fiscal year -- the estimate for the fuel subsidy will have to be revised upward. This in turn will require steep increases in domestic fuel prices, and in turn significant rises in electricity and transportation rates.
Further delay in the adjustment of fuel prices, or too low an increase of prices, could please the public, but would undermine the process of fiscal consolidation and damage the credibility of Susilo's fiscal management in the perception of the international market. Such a negative assessment would adversely affect market confidence in the country's economic prospects.
The 2005 state budget should therefore provide strong signals and clear direction regarding the new government's fiscal policies, foreign borrowing and resource allocation to support growth acceleration, one of the top priorities Susilo promoted in his campaign.
Foreign debt management has become much more pressing because the country is no longer entitled to debt rescheduling from the Paris Club of sovereign creditors, to which the government owes the bulk of its estimated $75 billion in foreign debts. Consequently, official capital flows have been negative since 2003.
The new government will have to tackle this foreign debt issue at a meeting with the Consultative Group on Indonesia -- the World Bank-coordinated creditor consortium -- in December. The dilemma, though, is that there has been increasingly strong political pressure to slash new foreign borrowing at a time when foreign debt servicing burdens have risen sharply.
Even Indonesia's economic growth target of 5.4 percent next year may be too optimistic, as the global economy is not expected to be as vibrant as over the past three years due to the steady rise in international oil prices. Our exports, already threatened by the end of the quota system in the global textile and garment trade in January, may decline sharply. This in turn would affect the pace of growth and the creation of jobs, as exports are one of the main engines of economic expansion.
It is therefore imperative for Susilo to maintain the market's confidence, as it would be impossible for him to implement his economic agenda, no matter how politically acceptable, under inimical market conditions.