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SIGNS OF RECOVERY |
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(Sadli, 21 November 1999)
After the conclusion of orderly general elections in June 1999 there were early signs of return of confidence and the start of economic recovery. This is not to say that the economy is doing well. If the GDP will grow a fraction of one percent for the whole year of 1999, that will be very gratifying. The recovery of the Indonesian economy, after the 13% contraction in a single year (1998), will show a U-curve recovery (with a flat part before a recovery climb). The hope is for some 4% recovery in the year 2000, if the present government can be successful in tackling the political agenda, i.e., preventing the break-up of the republic and to establish a more clean and transparent economic governance. According to the Central Bureau of Statistics, he country's gross domestic product (GDP) rose by 1.54 percent in the third quarter of this year compared to the second quarter; the third quarter GDP growth was up by 0.54 percent compared to the same period last year. The growth in the July-September period was led by the mining, transportation and communication sectors. Assuming that the economy will continue to post positive growth in the fourth quarter, full-year 1999 GDP is expected to grow by 0.12 percent compared to last year. CBS expects GDP to grow by 1.03 percent in the fourth quarter 1999 compared to the third quarter. Fixed capital formation in the third quarter increased by 2.14 percent compared to the second quarter, and its portion in the GDP increased from 18.42 percent to 19.11 percent. Although this indicated that the real sector had started to grow, the portion of the fixed capital formation in the GDP was relatively small compared to 35 percent in Thailand and South Korea, 32 percent in Malaysia and 25 percent in the Philippines. This means that investment in our economy is still low. Household consumption expenditure has not declined since the third quarter. The volume of goods and service consumed by households have tended to increase, but have been purchased at relatively lower prices, due to the low inflation in the third quarter. But real recovery of the economy cannot depend only on household consumption. Government consumption has also been lackluster. If salaries of government employees can be raised (which may happen) that will give consumption another boost. But investments are still languishing, although the market confidence generated by the Gus Dur government holds promise. Non-oil exports have been flat, in spite of a very undervalued rupiah. The major stumbling block standing in the way of recovery is still the unresolved problems of restructuring of banks and the corporate sector. The work of IBRA still lacks effectiveness and speed. The tug-of-war between debtors and creditors, including IBRA as a main creditor, is still largely unresolved. Among others, IBRA cannot give “haircuts” or discounts, while the new prudential requirements for the banks (e.g. CAR of 4) limits new lending. Such new lending is also blocked by the pile of bad debts still unresolved through restructuring and rescheduling. The deliberations between the new government and the IMF are very crucial, and the hope is that through give-an-take, with a spirit of mutual understanding of problems and limitations, a workable new letter of intent will be reached soon. The cooperation between the new minister of finance (Bambang Sudibyo) and the coordinating minister (Kwik Kian Gie) is reported good, and the IMF and World Bank have a lot of goodwill for the new government. The top leaders of the government only have to realize that those international institutions and major donor countries would like to see professional style governance, and to stay away from political interventions reeking of party interests. Test cases are the governance of IBRA and the ministry for state enterprises. The government can also be trapped in “populist policies”, that is, trying to please the poor without due regard to overall limitations of financial resources. Examples: the Jakarta government lobbied with the Vice President for execution of the subway project, but financing needs access to the “Miyazawa Plan”. The finance minister wants to finance a number of small credit programs by accessing the same Miyazawa facility. As if money grows on this tree. The large increase in oil prices will not have a significant net gain effect because the domestic fuel subsidies will only increase proportionately. Increase in these prices “will hurt the poor”. |
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