The virtuous circle

The virtuous circle

Improving macroeconomic stability, the steady, significant
progress in the implementation of reform measures over the past
18 months and several hugely positive developments in the past
two months have accelerated the process of the virtuous circle
within the Indonesian economy.

This in turn has markedly improved the market perception of
the country's economic outlook, and assured investors and
creditors that the process of Indonesia's economic recovery will
accelerate despite the risk of political turbulence during the
2004 election year.

There have been several new developments, especially over the
last two months, that have contributed to the speeding up of the
virtuous circle that started last year.

First of all, the market reacted positively to the white paper
on Indonesia's new reform agenda that was unveiled last month.
This means that the market sees the new reform programs, which
will replace the International Monetary Fund program that ends
later this year, as fairly credible.

Many analysts had been concerned that the complete termination
of the IMF program would upset market confidence in the country,
especially ahead of the 2004 elections, when almost all political
leaders, from the president on down to district chiefs, would be
preoccupied with campaigning.

Fortunately, the impressive policy performance over the past
two years has significantly improved the credibility of the
government in designing and implementing reform programs.

Late last month, rating agency Moody's Investors Service
upgraded Indonesia's sovereign rating in light of improvements in
its external balance and a significant decrease in its government
debt ratio.

Moody's said Indonesia's international reserves had risen to
levels that reduced the country's vulnerability to external
shocks, and that its international debts had fallen. This higher
rating will certainly decrease the costs of Indonesia's borrowing
overseas.

Last week, Standard & Poor's Ratings Services also raised its
long-term foreign and local currency ratings on Indonesia,
reflecting the country's good fiscal performance backed by
improving macroeconomic stability.

A stable rupiah exchange rate and increases in foreign
investment in banks and corporate assets (through asset
acquisitions) have improved international liquidity in the
country despite the termination of the IMF program later this
year, which will increase Indonesia's foreign debt service
burden.

Also last week, the IMF executive board in Washington
completed its 10th review of Indonesia's performance under its
US$5.2 billion extended fund facility arrangement, thereby
releasing a further $493 million to strengthen Indonesia's
international reserves.

The IMF praised Indonesia's economic performance, pointing out
that inflation continued to decline, the rupiah was stabilizing
and interest rates were on a downward trend.

However important these achievements may be for strengthening
the economic ability to weather any political turbulence next
year, complacency is out of question.

Finance minister Boediono cautioned at a seminar on Monday
that despite all the impressive progress, Indonesia was still
only half-way through the first of four stages of development the
country must pass through in order to achieve sustainable growth
of more than 5 percent, which is needed to absorb the
unemployed.

Boediono said further concerted efforts were required to
strengthen basic institutions (good governance), and additional
reforms of microeconomic policies and their supporting
institutions were necessary to reinvigorate investment.

Bank Indonesia Governor Burhanuddin Abdullah shared Boediono's
message of caution, saying on Monday that banks had yet to fully
return to their function of providing lifeblood (credits) to the
economy. Most banks remain overcautious in new lending and are
hesitant to lower interest rates due to the persistently high
risks in the business sector.

The string of impressive achievements should not lull the
government into complacency, as the overall economic condition of
the country is still vulnerable to internal or external shocks.

Yet the accelerated process of the virtuous circle will
hopefully strengthen the confidence of the government and the
House of Representatives in taking on tougher reforms, especially
governance and judicial reforms.