Unrest may derail RI recovery

JAKARTA (JP): The deadly protests and riots shaking the city last week would derail economic recovery in the country, experts said on Tuesday.

Sri Mulyani Indrawati, an economist at the University of Indonesia, said the bloody protests and riots had created market uncertainty, especially for foreign investors.

"It shows that Indonesia is not stable and carries high political risks," Sri added.

She said private funds, which were badly needed to drive Indonesia out of the crisis, would not come until political and legal certainty was restored.

However, Sri criticized the government's repressive actions against dissidents in a move to pursue political stability.

"Stability created through such repressive measures would be vulnerable. It would not be strong enough to support economic recovery."

"Therefore, the government should solve various pressing political problems using sustainable and civilized political mechanisms."

She said that the government was too optimistic in its prediction that Indonesia's economy would improve in the first half of 1999 as stated in its letter of intent to the International Monetary Fund.

Economy, she said, would not bottom out until the second semester of 1999, considering various political events like general elections in the middle of next year, the convening of the People's Consultative Assembly and various factors affecting the decision-making process of a new government.

"It would be safe to say that our economy would likely book positive growth in the first semester of year 2000."

Nevertheless, IMF Asia Pacific director Hubert Neiss said continued political unrest in Indonesia may have a negative impact on the country's shaky economy.

He noted, however, that he still saw "significant scope" for the rupiah to strengthen, despite the unrest.

"We have to see if the (political) uncertainty continues for a while," Neiss said. In that case, "it will affect expectations and may have an unfavorable impact (on economic recovery)."

"To me personally, the main damage of the last few days has been the loss of life and the reduction of confidence," Neiss told Dow Jones Newswires.

Deadly protests and riots shook the Indonesian capital on Friday. At least 15 people, including seven students, were killed when the military turned on student protesters.

The violence was the worst in Jakarta since May, when much heavier rioting swept the city and helped unseat President Soeharto after three decades in power.

Neiss said the impact on the rupiah will depend on how long investors see the unrest continuing.

"If they think it's the beginning of a prolonged period of instability, then it would affect the exchange rate and capital would flow out," Neiss said. If the unrest proves temporary, Indonesia's improved economic performance should help the currency, he added.

"On the economic side, all things point to further strengthening (of the rupiah)," Neiss said.

He noted that inflation has been falling rapidly, the current account surplus is substantial, official aid is flowing in and the budgetary situation has improved markedly.

He praised the country's compliance with its IMF program.

"Indonesia's economic performance has been exemplary," Neiss said. "By now, it has sunk in that economic policy is firmly on track."