Kadin Indonesia

	NEW EUPHORIA TOUCHING THE MARKET
	> Kadin Indonesia Bulletin <

June 28, 1999
The general elections have proceeded orderly although many irregularities were reported by a large number of election watchers.
The effect has been euphoria in the market. The rupiah rate of exchange has appreciated substantially in a few weeks, interest rates going down and share prices going up steeply. The IMF has added to the bullishness by saying that GDP may experience a small growth this year and inflation falling to single digit levels. When the exchange rate of the rupiah pierced the Rp 7000 level, central bank officials opinioned that it may still strengthen further more. Hubert Neiss of IMF also speculated that it the rupiah is still undervalued after the political factor is discounted. In Thailand the depreciation of the baht has been less than 50% and in Korea the won is inching towards its pre-crisis value. Hence a Rp5000 per dollar rate would not be unrealistic since that would mean a 50% depreciation of the rupiah. The cumulative inflation has been close to 100%.
On the other hand, exporters are concerned that their competitiveness will be eroded, since wages and other domestic costs have risen much in the course of the crisis. Sooner or later there will be government induced price and rate hikes when some of the subsidies will be reduced. In anticipation of this the Bank Indonesia has (in May) forecasted a rate of inflation for 1999 of some 11-13%, in contradiction to IMF estimates. In the meantime, the rate of inflation for June is expected to be flat again.
Hence macro-economic indicators are showing encouraging trends. In the stock and capital market a new East Asian wide bullishness is reported. American and European funds are attracted again to Asian markets which are being rediscovered as (re)emerging. Market confidence is fickle, with short memory. Only Japanese money is still shy reentering Asia, but sooner or later everybody will be afflicted by a herd behavior and going after bargains in Asia. The latest quarterly GDP growth figures of Japan are robust and that may boost market confidence further.
But the Indonesian economy is not out of woods as yet, probably not before the end of the year. The figures of the Central Bureau of Statistics for exports and imports still paint a dismal picture. But perhaps these official statistics have not really captured the latest trend. Usually they are three months old.
A number of foreign as well as large domestic manufacturing companies have become more optimistic and are planning increased production.
Domestic companies, especially the large conglomerates, are still wrestling with their balance sheets. They still have no solution for their huge debt overhang. But the strengthening of the rupiah going towards Rp6000 per dollar and the drop in interest rates will improve their rating and their prospect of survival and recovery. The wait is for resumption of normal working capital flows. Economic Coordinating Minister Ginanjar foresees interest rates soon to go down to below 20% per annum.
It appears that the recovery of the Indonesian economy will be fuelled by foreign investors (FDIs) and foreign funds coming into the market, then reinforced by backflow of domestic capital which earlier fled the country.
The IMF has complained about underspending of the government budget. Part of it was caused by obstacles in spending, e.g., for the social safety net programs. The IMF supports the policy that the recovery of the economy should be stimulated by expansionary fiscal and monetary policies. Quite a change from its recipe in 1998. But the expansionary budget should be financed by adequate foreign aid. And so far the IMF, the World Bank, the Asian Development Bank, as well as the government of Japan have been very supportive.

The developments in the political arena still harbor many uncertainties. PDI-P as the party collecting the biggest number of votes is fully entitled to lead the new government. But in the 700 seats MPR (Congress) it will have difficulties to garner support for a Megawati presidency.
Golkar in the parliament and the MPR will be the second biggest party, and is still ambitious to continue the (Habibie) government, with the help of Moslem parties and others,

Two parties will hold the key in the presidential elections, the military with 52 votes and PAN with some 40 votes. They can swing them to either PDI-P or Golkar, but not necessary supporting either Megawati or Habibie.
(Sadli, 28 June 1999)