Jakarta’s rescue deal ‘a bold step’

Regional currency and stocks turmoil ————————————

THE Indonesian government’s 10-point rescue package in the wake of the rupiah crisis is a bold step towards restoring investor confidence in the economy, analysts said yesterday.

They told The Straits Times that the move was an attempt by the government to attract more foreign investment and funds into the economy.

“It is a market-oriented package which addresses specific aspects of the economy with the broader aim of raising foreign investors’ confidence,” said Mr David Chang, research director of Trimegah Securities here.

He said a clear indication of this was that investors were starting to pour funds back into Jakarta’s listed companies, causing the benchmark stock index to soar 7 per cent, after the package was announced on Wednesday. It rose another 4.2 per cent yesterday.

The 10-point plan, among other things, aims to liberalise foreign purchases of shares, lower interest rates, encourage exports, postpone government projects and restore stability to the currency market.

Of particular interest to economic observers here is the move to abolish a 49 per cent limit for foreign investors to buy IPO shares.

An analyst from a local securities firm said: “That has never been on the cards for nationalistic reasons.

“Scraping foreign ownership limitation is a sure boost for investor confidence. By lifting the limit, the government wants more foreign funds to flow in.

“In the process, the demand on the rupiah will also increase.”

At the same time, he noted that lowering interest rates was “tactically sound” following the government’s moves to float the rupiah and increase SBSI rates in the last few weeks.

“Now they want to reduce rates which is a good move because a high rate situation could prove detrimental to economic growth and hit the market badly.”

But others are not too sure if this could yield immediate results.

Economist Umar Juoro of the Centre for Information and Development Studies said: “It is very hard to lower interest rates quickly. It will be a long haul for the government to do that and despite the measures they have taken, foreign sentiment in the market will remain weak.”

He pointed out that there were a number of “grey areas” in the 10-point package.

One is the lifting of foreign ownership shares which he said would be beneficial to foreign investors and the Indonesian economy only in the short-term.

Local investors, he said, stood to lose out in the long run because foreigners would have greater liquidity and increased purchasing power with a lower rupiah rate.

Another issue which needed to be looked at is measures to boost exports. He said the main problem now stemmed from structural flaws in the economy such as low labour productivity and poor tax incentives.

Low export growth had very little to do with fluctuations in the exchange rate, he stressed.

Economists said that in addition to these problems, the government had yet to address fully bureaucratic red tape and corruption in Indonesia which proved to be the biggest obstacle to gaining foreign investor confidence.

Mr Chang said that despite “certain flaws one might expect in all new policies”, the government was moving in the right direction.

“They are taking various steps which will impact on the economy gradually. The rupiah recovery will take place but over a period of time and not immediately.”