Again, Jakarta’s economic planners show their mettle

BAD times, as the saying goes, often produce good policies.

Economic planners in Indonesia seem to be guided by this dictum, seen once again with their announcement last week of an economic rescue package to halt the downward spiral of the rupiah.

Observers here said it again demonstrated the Indonesian government’s ability to respond in pragmatic fashion during an economic crisis. This has been the hallmark of the country’s success over the last decade.

Their track record over this period is instructive.

In the 1980s, the nationalist star faded with the fall in prices of oil, which, as an export commodity, had an “opiating” effect on the government’s vision of economic development.

Through a series of reform measures, Indonesia’s economic planners deregulated the economy, dropped protectionist policies, and shook up the financial sector.

The economy recovered from the fall in oil revenues to maintain an annual 7 per cent growth by the late 1980s, and the Indonesian capital market brought the country’s economic resurgence to the outside world.

Foreign brokers flocked to Jakarta to set up offices and new portfolio investments flooded in.

The government had, at the height of the country’s economic woes, discovered the wisdom of the market economy, which still continues to influence the broad contours of policy.

Consider the situation now. Indonesia – along with Thailand, Malaysia and the Philippines – reeled under the assault of speculators who forced central banks to abandon efforts to prop up their currencies.

The Indonesian rupiah, like the Thai baht and Malaysian ringgit, nosedived promptly to record lows – 12 to 25 per cent lower against the dollar more than a year ago.

In the initial stages of the crisis, the Indonesian government’s response was to spend money to prop up the rupiah, which it subsequently floated.

When the measure failed, the government announced a comprehensive 10-point package to maintain economic stability.

The plan, among other things, aims to liberalise foreign purchases of shares, lower interest rates, encourage exports, liquidate weak banks and postpone a number of government projects – measures which indicate that Jakarta is serious about tackling the currency turmoil.

While, it is still early to gauge the full impact of the rescue package on market sentiment, there were a few telling signs.

A day after the package was announced by Finance Minister Mar’ie Muhammad, investors started to pour funds back into Jakarta’s listed companies, causing the benchmark Jakarta stock index to soar 7 per cent.

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

Therein lies the nub of the issue. The thinking of government here is that strong investor confidence will prevent another nasty mauling of the rupiah.

This will in turn accelerate the market process for the battered currency to settle at its equilibrium rate, enabling authorities to ease tight monetary measures.

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

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

“By lifting the limit, the government wants more foreign funds to flow. In the process, the demand on the rupiah will also increase.”

But others see this as only a short-term measure.

Economist Umar Juoro of the Centre for Information and Development Studies said local investors stood to lose out in the long run because foreigners would have greater liquidity and increased purchasing power with a lower rupiah rate.

“This is giving foreign investors undue advantage and dominance in the economy,” he said. “For the time being it is acceptable. But not for the long term.”

Analysts also highlight the lowering of interest rates as a “tactically sound move” following the government’s moves to float the rupiah and increase SBSI rates in the last few weeks.

They pointed to the government’s versatility to navigate the roller-coaster-like currency crisis.

Mr Rizal Ramli of the independent Econit advisory group said raising SBSI rates was one way to defend the rupiah and boost Indonesia’s foreign exchange. But it was a measure that did little to protect the capital market, business and banking sectors.

Following the announcement, the Bank of Indonesia lowered interest rates on its one-month certificate by 300 basis points to 27 per cent.

If these rates remain above their normal level of between 8 and 11 per cent, business operations will remain at a standstill and many banks, hit by bad credit, would see their asset bubble burst.

Said Mr Ramli: “There was some ambivalence by the government in the beginning. But in the end, it decided that reducing interest rates was the right move because a high-rate situation could hit the market badly and prove detrimental to economic growth.”

In line with its policy of boosting Indonesia’s exports, the government announced measures which included cutting import taxes on goods important to export industries. It was also planning to reduce import growth by raising taxes on luxury goods “that are not essential for development”.

Some economists see this as raising the momentum to push up exports once the exchange rate is corrected. But others are not too sure.

Mr Umar, for example, pointed out that sluggish export growth had nothing to do with fluctuations in the rupiah.

The main problem stemmed from structural flaws in the economy such as low labour productivity and poor tax incentives for small and medium-sized industries.

Economists and businessmen said that while the 10-point plan was impressive on paper, implementation and follow-up measures were critical.

The track record of the Indonesian government on this score, while commendable, is still far from perfect.

Observers said projects with large import requirements and which are not immediately required – such as the aircraft development programme and even public infrastructure- must be the first to go.

This is a litmus test of sorts for the government in implementing the package.

How far it goes on its choice of projects to be shelved or postponed will determine the credibility of this rescue package.

No clear signs have emerged from Jakarta on this matter and analysts said it would take time to resolve, given the “internal struggle” among Cabinet ministers of “nationalist” and “technocratic” bent, as well as differences between ministers and politically well-connected conglomerates.

Another litmus test is to see how government deals with weak banks.

Bank Indonesia, the central bank, has often been criticised for being vulnerable to political pressure.

The government also had to address bureaucratic red tape and corruption which has proved to be the biggest obstacle to gaining foreign investor confidence.

Despite being buffeted by broadsides from critics, observers said the rescue package was a bold initiative by the government to restore the country’s economic health.

Said Mr Dennis de Tray, the chief representative of the World Bank in Indonesia: “It is a step in the right direction for sure. Indonesia has a long history of balancing national interests and pragmatism with regard to economic management.”

The measures, together with Indonesia’s strong economic fundamentals, is a sure formula for the rupiah’s recovery.

GOOD TRACK RECORD
In the 1980s, the nationalist star faded with the fall in prices of oil, which, as an export commodity, had an “opiating” effect on the government’s vision of economic development …

Indonesia’s economic planners deregulated the economy, dropped protectionist policies, and shook up the financial sector. The economy recovered … to maintain an annual 7 per cent growth by the late 1980s, and the Indonesian capital market brought the country’s economic resurgence to the outside world.

Foreign brokers flocked to Jakarta to set up offices and new portfolio investments flooded in.

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