Tighten your budget as the crisis sinks deeper

Tighten your budget as the crisis sinks deeper

What are the prospects for Indonesia's economy in this new
year after a prolonged monetary crisis last year? Economist Mari
Pangestu discusses the issue.

Question: Since the start of the monetary crisis in July the
rupiah has lost more than 50 percent of its value against the
U.S. dollar. Will this help boost Indonesia's exports in 1998?

Mari: The rupiah depreciation, which lowers production costs
in terms of dollars, will surely increase the competitiveness of
the country's exports, particularly those with low import
contents. However, the tight liquidity supply resulting from the
monetary crisis could affect the cash flow or working capital of
some companies, which then may find difficulties in benefiting
from such export opportunities.

Q: The rupiah's value, which plunged below 6,000 to the U.S.
dollar recently, is now hovering at about 5,000. What is the
sound level of the rupiah?

M: The current value of the rupiah on the spot market is too low.
The equilibrium value, based on various methods of calculation,
should be around Rp 3,500 to the dollar, with a maximum level of
Rp 4,000.

Q: Do you think the country's export development will contribute
to the country's current account payments?

M: During the first nine months of this year alone, the country
suffered a current account deficit of US$8 billion. This level
should be all right if the economic condition was normal, but it
is burdensome since the economy is in a crisis. However, 1997's
current account deficit by December was estimated to be less than
that because imports were decreasing in the last few months.

In this year, the current deficit should decline if the
government, now implementing a reform package under the auspices
of the International Monetary Fund (IMF), succeeds in checking it
at a maximum of 3 percent of the country's gross domestic product
(GDP).

(According to the official note of the government's 1997/1998
budget plan, GDP was recorded as Rp 474.63 trillion -- $90.9
billion at the current rate -- as of March 1997.)

Q: Do you think capital inflows will offset the current account
deficit in the country's balance of payments?

M: I think the balance of payments was OK in 1997. But in 1998,
we will probably need IMF funds to offset possible declines in
the inflow of capital. We have usually needed only about $5
billion in aid to balance our (international) payments, so we are
likely to need around $10 billion to $11 billion in 1998.

We can only expect the return of private investments to the
country if the results of the March convention of the People's
Consultative Assembly (MPR) help improve the investment climate.
However, capital inflows will be expected only from the United
States and European countries and from the return of investments
which have left the country during the monetary crisis. We can no
longer expect an ample inflow of investments from Japan and South
Korea, which are now also facing economic problems.

Q: How do you see economic growth in 1998?

M: The economy should have grown by 5.5 percent in 1997 on the
grounds that it had expanded by 6 percent during the first
semester of the year -- one month before the start of the
monetary crisis.

In 1998, the economy is expected to grow by 3 percent on the
condition that investor and public confidence can be regained,
the IMF-sponsored reform package is effective and banking
interest rates decline.

Q: Do you see that the currently unfavorable economic condition
will affect the government's 1998/1999 budget, which will be
unveiled by President Soeharto on Jan. 6?

M: Sure. The government's tax revenue will decline in tandem with
decreases in private sector profits, but its revenue from oil and
gas will likely increase due to rises in oil prices on the world
market and the sharp appreciation of the dollar against the
rupiah. But the increases in the oil and gas revenue will not be
able to compensate for the increases in debt services.

The government's 1998/1999 budget, therefore, will not be of
any help to the country's economic development.

Q: The inflation rate slightly exceeded 10 percent for 1997. Do
you see any improvement for prices in 1998?

M: Inflation may reach 10 percent to 11 percent in 1998 since
there will be sharp increases in food prices in the first two
months of the year and the government will most likely raise fuel
prices and electricity rates.

Q: How about capital market development in 1998?

M: The capital market will be the first economic institution to
recover as investors will soon buy stocks at their current low
levels, which could produce profits.

Q: How will the economic crisis change the patterns of people's
spending and business trends?

M: People affected by the rupiah's depreciation, decreases in
agricultural harvests due to the long drought and reductions in
pay, will surely tighten their budgets, while companies will have
to consolidate themselves. Companies which have large debts will
have to reduce activities or restructure their share ownership to
generate more capital. (riz)