RI CAREFULLY WATCHING EUROPEAN FINANCIAL CRISIS

By Andi Abdussalam

Jakarta, May 26 (ANTARA) - Indonesia will continue to cautiously watch a possible escalation of the Greek financial crisis although its economic fundamentals are relatively strong.          "The world economy is improving but we have to maintain cautiousness against risks that could arise as a result of the financial crisis in Greece," Chief Economic Minister Hatta Rajasa said.          Basically, Indonesia's good and stable macroeconomic fundamentals are able to protect the country from the impact if the financial crisis in Greece is worsening.          "But we have to keep abreast of the developments of the Greek crisis and be ready to take appropriate steps," the minister said on Tuesday.           The same concern was also expressed by outgoing Finance Minister Sri Mulyani Indrawati last week.          Speaking to the House plenary on the macro economy and fiscal policy for the 2011 budget year, Sri Mulyani said that the government would keep watch of financial crisis that was taking place in European countries. This is a challenge for Indonesia in formulating its fiscal policies in 2011.          "The mixed signs of recovery in on hand and uncertainties on the other in Europe are a challenge Indonesia is facing in formulating its fiscal polices for 2011," Mulynai said.          According to reports, Greece has been facing financial crisis with an overall public debt of about 300 billion euros (399 billion dollars).  The Greek debt drama has mushroomed into the biggest crisis in the euro's 11-year history, sparking concerns that it could spread to other weak members of the single currency area battling runaway deficits and debt.          According to Sri Mulyani, the Greek financial crisis has forced Western European countries to take salvaging policies. Although the economic turmoil has begun to recede, yet corrective steps still needed to be taken amid the difficult struggle that will still last for sometime, including how to reduce budget deficit.          "The European financial crisis still keeps uncertain potentials that burden the recovery of the world economy," Sri Mulyani, who will be assuming her post as a managing director of the World Bank next month, said.          She said the European economic crisis reminded that even though it was able to give solution and create economic growth in short term, bad and unsustainable economic policies such as poorly planned fiscal expansion would in the long run create serious and deep economic crisis.          "Indonesia must continue to ensure that its economic policies would be formulated on the basis of prudential combination where macro economic instruments are aimed at maintaining long term equilibrium and economic stability, while structural constraints must be overcome by comprehensive and sustainable reform polices," she said.          At present, it could be said that the global economic situation is still fragile and full of uncertainties, despite the fact that in general term it is showing a trend of recovery.          "Countries like Portugal, Italy, Spain, Ireland and Greece have the potentials to experience a heavy fiscal condition with the government debt ratio far above the agreed maximum level of 60 percent. This condition could cause the weakening of confidence in these countries' state debentures and in euro currency," she said.          She said that the threat of the global crisis --as a result of the European economic crisis triggered by expansive fiscal policies with high and long term budget deficits-- would lead to a debt crisis for the state.          "The European financial crisis has the potential to create financial crisis escalation as a result of the systemic impact of declining confidence. The weakening of the euro currency and the fall of state debentures have the potentials to affect the financial and banking sectors," Sri Mulyani said.          However, the impact of the Greek financial crisis has so far no  serious effect on Indonesia's economy as reflected in the country's economic growth (5.7 percent), upward investment trend (25 percent) and significant growth of industries (4.01 percent) in the first quarter of 2010.          "The economic turmoil that plagues Greece will be overcome soon so that it would not have serious impact on the global and Indonesia's economies," Senior Deputy Governor of Bank Indonesia (BI) Darmin Nasution said.          The impact of Greek financial crisis was only sligtly felt by the country's stock exchange.          "The stock price index (IHSG) happened to drop as a result of Greece's financial crisis. Indeed there was a downward trend in stock prices. It was the influence of the same trend in Greece, Portugal and Spain," Hatta Rajasa said.          The minister made the comments when last week the composite stock price index (IHSG) fell 112.7 points or 3.18 percent to the 2,846 level and the weakening of the rupiah from Rp9,020 to Rp9,110 per US dollar.          He was sure that the decline in the stock price index would not continue because Indonesia's economic fundamentals were still well maintained.          Therefore, the government is optimistic that Indonesia?s economy will grow 6 percent in the second quarter of 2010. "I am optimistic it will grow 6.0 percent in the second quarter. Many quarters have even predicted our economic growth will exceed 6.0 percent in 2010, or higher than the target of 5.8-6.0 percent," Hatta Rajasa said.          Darmin Nasution also shared Rajasa's optimism, saying that Indonesia's economic growth would reach 6 percent at the end of the year, though there was economic turmoil in Europe.          "We hope it would be more that the targeted 5.8 percent. It is not impossible for the country to reach a growth of 6 percent," Darmin Nasution, who is also acting governor of the Indonesian central bank, said.      (T.A014/A/H-NG/A/O001) 26-05-2010 11:36: