FRAGILE STABILITY CONTINUING
> Kadin Indonesia Bulletin <
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FRAGILE STABILITY CONTINUING |
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> Kadin Indonesia Bulletin < |
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9 March ’99 The title of our editorial last month was “Some silver lining?”, where we were searching for signs of emerging stability, in politics and economics. The violent outbursts in Ambon shattered the image, perhaps also the hope. On the other hand, the rate of exchange of the rupiah remained “relatively stable” at close to Rp9000 per US dollar, in spite of the disturbances. (Note: this rate was Rp7500 in November and hence the rupiah lost ground in three months) The rate of inflation for February has subsided from the high level (2.76%) of January, the Ramadhan peak season. This monthly rate for February was 1.26%. The inflation rate for the last 12 months is 53.4%. The Central Bureau of Statistics expects that this rate will further abate because of the good harvest. At the moment the price of rice is going down and one hears demands for the government to stop imports. The SBI (central bank’s paper) interest rate is still high at around 37%, causing “negative spread” (lending rates below cost of money) to continue. Such SBI rates should come down to a level of 30% p.a., because the expected inflation is about 20% p.a. The high SBI interest rates are still an indication of nervousness. In Thailand, Korea and Malaysia interest rates have returned to pre-crisis, i.e. single digit levels. The government policy to close banks with a more than 25% negative CAR (capital adequacy ratio) has run into trouble because the government backed down from its announced deadline, i.e. 27th of February. The period is extended by two weeks. On one hand it sounds reasonable to reduce the number of very bad banks that have to be closed, on the other hand it has sent signals of a less determined government team not able to withstand lobby pressures. Most of these banks are controlled by the economic and political elite and the owners have used their clout. But it is interesting to note that no banking rush occurred, although there are indications that deposits are moved from private domestic to state and foreign banks, perceived to be safer. In the meantime, the recapitalization plan, costing the government billions of dollars in cash interest payments for the bonds issued, is still a political bone of contention. There is public consensus about the need for banking restructuring and recapitalization but there are many critics challenging the efficacy and efficiency (whether it is the least cost way) of the government’s effort. On the other hand, the IMF and the World Bank are supporting the plans and there is good hope that the total amount of foreign aid will prevent the government budget’s deficit producing hyper-inflation. The expected amount of total foreign aid will be about US$10 billion, part of it will come from the Myazawa Plan. Hence, the budgeted cash cost to defray the interest costs of the government bonds to recapitalize the banks will in the end be borne by foreign aid. The large foreign aid last year and this year, more than double the regular amount before the crisis, is cushioning the society from the shock of a 15% contraction of GDP in 1998. That is fortunate. On the other hand, it may tend to postpone hard decisions the government has to make, eventually, to adjust the economy to the new equilibrium after a perhaps a 100% cumulative inflation and the rupiah exchange rate closer to Rp8000 per US dollar (as compared to the pre-crisis level of Rp2500). Large subsidies are still given to public utilities to avoid shocks for the consumers, but such consumers are urban people not belonging to the poorest. But their advocates, e.g. the consumers union, parliament, NGOs, resist rate and price hikes for electricity, fuels, toll roads, telephone and public transportation. Perhaps they are right for this year, but will make the life of the new government next year very difficult. There are a few signs of incipient recovery in the real sector. Indonesia's trade surplus narrowed to $1.41 billion in December from $1.61 billion a month earlier, reflecting a slight pickup in imports, lending evidence to the view that the economy may have bottomed out. The Central Bureau of Statistics said the country's imports rose to $2.49 billion in December from $2.29 billion in November, but were down from $3.16 billion a year earlier. Exports were the same as in November -- at $3.9 billion -- but down from $4.7 billion a year earlier. The year 1998 was really a very bad year but the problem now is whether, on the margin, there are signs of pick-up. There are. Provinces living from agriculture and commodity exports are doing well. Labor intensive exports of manufactures from Java are recovering, at least measured in capacity utilization. They can realize rupiah profits although in dollar terms bottom lines are often still dismal. But even manufacturing for the domestic market has shown some improvement in production and sale, for instance food processing, and other consumer’s goods for daily use. (SADLI) |
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