Indonesia announced deep, wide-ranging spending cuts and delays in major projects on Tuesday to help cope with financial upheavals but although economists hailed the move, markets reacted coolly. Finance Minister Marie Muhammad told parliament that projects worth some 39 trillion rupiah ($13.22 billion) would be postponed, and projects worth 63 trillion rupiah would be reviewed.
He also announced a cut in budget expenditure on development programmes amounting to 3.28 trillion rupiah, effectively slashing the 1997/98 (April-March) budget by 3.26 percent to 97.8 trillion rupiah ($33.15 billion).
The national budget would otherwise end up heavily in the red, Marie told parliament.
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He said the belt-tightening was aimed at capping the current account deficit at three percent of gross domestic product (GDP) for the next two years. But markets shrugged off the move, with the stock market weighed down by a combination of bearish factors including ethnic violence in eastern Indonesia, increased redemption in mutual funds and general regional equity weakness.
The Jakarta composite index slipped 2.89 percent to 534.83 points at the close despite gains at the opening in anticipation of economic reforms.
The rupiah, however, held on well against the dollar although it was briefly driven down by weakness in the Thai baht and the ethnic riots in Ujung Pandang, South Sulawesi.
A mob of Indonesians stoned shops owned by ethnic Chinese and burned cars in the capital of South Sulawesi province on Tuesday after a young girl was hacked to death, police said.
The rupiah weakened to a low of 2,955 from an opening of 2,930/38 on Tuesday before settling at 2,948/52 to the dollar at the close in Jakarta.
Marie said the government would slash spending on projects with high import content and those funded from overseas because of the turmoil sparked by a slide in the rupiah.
However, he said foreign debt repayments would not be affected and it may even be possible to make prepayments.
Indonesia is a major foreign debtor nation and total debt is estimated at about $110 billion.
The government has taken the appropriate measures to deal with the macroeconomic problems, said Stephanus Partono, an analyst with Goldman Sachs in Singapore.
The cutback in fiscal spending should reduce the pressure on the current account and the breakdown of the projects that are going to be rescheduled showed that the government has a concrete plan to deal with current problems, he added.
We think that the recent measures should accelerate the recovery of the economy, but in the near term, we are likely to see a slow down, he said.
Although investors are quite positive on the recent move I think its probably a bit too early to get into the market at the moment as we will probably see slower economic and earnings growth in the next six to 12-months, Partono said.
Vincent Low, fixed-income strategist at Merrill Lynch in Singapore, said the reform package should improve sentiment although most policies that were forward-looking and addressing the root of the problems would take a long time to spin out.
Its a good sign that you dont have to keep rates so high to defend your rupiah. It would impact GDP in the interim, but a three percent cut (in the budget) wont do substantial damage to growth.
Marie said the 1997/98 budget would face a shortfall of 9.2 trillion rupiah unless steps were taken to cushion the effects of falling government tax revenues and an extra burden on the fuel subsidy programme caused by the slide in the rupiah.
The rupiah has fallen about 25 percent against the dollar since the start of the year.