Survey of recent developments

Abstract

The Indonesian economy continued to stabilise in 2002, and to recover in the second and third quarters of the year from poorer performance in the previous year. Confidence was helped by a successful MPR session in August, which completed the round of constitutional reforms begun several years earlier, including provision for direct election of the president and vice president and a new bicameral elected national assembly. Sadly, just when macroeconomic conditions seemed more favourable than for some time, the tragic events in Bali in October threw a cloud over growth prospects for the final quarter and the coming year. All the indicators of macroeconomic performance had turned around by August-September. The exchange rate had appreciated significantly, year-on-year inflation was down from 15% in February to 10% by August, and nominal interest rates had fallen. These developments supported much more favourable budget outcomes for 2002. The assumptions for the proposed 2003 budget appeared generally plausible, although the 5% growth target seemed a little too optimistic, the more so in the wake of the Bali bombings. Divestment of shares from both Telkom and Indosat appeared to have secured the government's budget target from IBRA sales for 2002, and the fire sale of IBRA debts added another Rp 23 trillion to the public coffers. Although investment still remained flat, there had also been some important signs of credit expansion for small and medium enterprises. Some breakthroughs were achieved in the private sector, such as a resolution in the long-standing Kalimantan Prima Coal dispute on divestment of its majority shareholding, and a favourable court ruling in the Manulife case (Athukorala 2002: 145 and 147-8). At the same time, recovery in both domestic demand and exports was halting. International confidence was not helped by National Planning Agency head Kwik Kian Gie's continuing focus on early 'graduation' from the IMF program. Asset sales were delayed because of haggling over the disposal of a 51% share in Bank Niaga and there were signs of spreading agricultural protection, much of it in the form of NTBs. There were strong indications that labour regulation and associated unrest were beginning to affect the investment climate. Labour-intensive manufacturing exports suffered in particular, raising much concern about job creation. The crisis over repatriation of large numbers of overseas workers from Malaysia from early 2002 did not help the labour market, especially in Eastern Indonesia. Show more