Indonesia Rebuilds Confidence, Slowly
Loveard, Keith, Global Finance
While Indonesians have decided that life must go on and official statistics confirm that the worst is over, the country's political and economic transition is still very much in progress.
Well over a year after the ouster of strongman President Suharto, there is a sense that however bad the news is on the political front, Indonesians have decided that life has to go on. After two years of trauma, in which the country that was hyped as Asia's latest economic tiger descended to the level of an international basket case, a mood of improved confidence has been apparent in recent months. Jakarta residents especially have begun to go back to their old hobby of consumption. Official statistics have tended to confirm that the worst is over. Both the World Bank and the Indonesian government are predicting growth in the current fiscal year of between 1.5% and 2.5%. Inflation has been negative for five consecutive months. Interest rates are way down from last year's giddy 70%.
There are, however, many who believe the return of confidence is premature. "We are seeing growth, but it's purely based on the fact that we had a good wet season and agricultural production is up," says economist Rizal Ramli. "The real sector is still going backward. Indonesia is still in the stage of restructuring, not yet recovery."
Conflicting signals about the state of the Indonesian economy continue to unnerve business. "You get a different opinion from everyone you talk to," worries John Arnold, chairman of the British Chamber of Commerce in Indonesia. The country's political transition is still very much in progress, he says."We are entering possibly the most vital and potentially dangerous stage in the run-up to electing the next president."
Dandossi Matram, vice president for Bakrie Finance, believes a second crisis is looming that could be far worse for Indonesians than the first. He sees the threat coming from global instability. Dollaryen fluctuations sparked by the US Federal Reserve's decision to boost rates are hitting Asian currencies hard, he notes.
The Thai baht has hit a four-month low, and the Indonesian rupiah, stable around 6,500 to the dollar for some six months, hit 8,000 on August 11 and seemed set to go further south. Like Ramli, Matram agrees there is no productive capacity. If a second crash does come, Indonesia's average middle-class worker will have nowhere to run.
Even the World Bank agrees. Despite its estimate of growth after two years of decline, the bank warned on August 6 that the prospects for the economy remained fragile. Bank economist Bert Hofman notes that domestic demand remains weak. "People are much poorer now," he told a recent seminar, noting that real wages had fallen as much as 35%, while massive unemployment had seriously cut into domestic savings.
Gloom and doom aside, there remains room for cautious optimism. While the manufacturing and service sectors remain comatose, a number of important productive areas are working well. Oil and gas and mining have been virtually untouched throughout, though regional recession and low international prices have taken a toll.Tourism is getting back to normal, with the market now aware that the violence that is continuing is far from the major resorts of Bali.Agricultural commodities will actually profit from the declining rupiah.
A number of major corporate groups have completed tedious and often turbid negotiations on debt restructuring. …