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Indonesia announces boost to investment
Indonesia's government has announced a raft of policy changes and banking measures to boost local investment and growth, as Helen Brown reports.

Indonesia's government has announced a raft of policy changes and banking measures designed to address its current financial strife.

The government and the central bank argue the new moves will boost investment and growth, and reduce imports.

But it will be a testing time for Indonesia, a country which, not so long ago, was an international economic darling.

Helen Brown reports from Jakarta.
(Footage of Bank of Indonesia press conference is shown)

HELEN BROWN, REPORTER: It was at the end of a sobering week, Indonesian ministers and business leaders stood together pitching a range of measures to reassure markets that the emerging economy would survive the current storm.

A storm that had seen a plunge in the currency, capital being dragged out of the system, and the share market taking another battering.

CHATIB BASRI, INDONESIAN FINANCE MINISTER: As I always said, bad times make good policy. And this is the proof that this time really, you know, we can come up with a good policy.

HELEN BROWN: The government says it' new measures, such as tax breaks, will ensure labour intensive industries keep jobs and continue exporting. It will look at creating a more orderly wage setting system in a country that's posted a vast increase in the minimum wage. And drop a much maligned regulation that would have curbed the export of raw minerals.

BEN BINGHAM, IMF SENIOR RESIDENT REPRESENTATIVE, INODNESIA: Some of these headlines look as if they're heading in the right direction, but how deeply will they be implemented and how comprehensive will that implementation or will the strategy be?

(Footage of café in Indonesia is shown)

HELEN BROWN: Indonesia's role of good times, with growth above 6 per cent, has seen businesses like these grow. But now they are feeling the pinch. The currency has been falling, moving quickly down to levels not seen for several years. That reduces not only buying power but important profit margins.

IVAN SETIAWAN, DIRECT, S2 RESTAURANT AND CATERING: Which cannot buy the material as cheap as we're used to. And the result is that we now we have to increase price also, the selling price for customers. But the increase cannot be too high, otherwise our customer will be, will run away.

HELEN BROWN: Malls like this are springing up all over Indonesia, particularly here in Jakarta, where a growing middle class comes to relax, enjoy, eat and spend their money. The question is, with the value of the currency weakening, are they going to keep that money in their pockets for longer?

Until now, South East Asia's biggest economy has been a global darling. Offering a place to park funds and invest while most of the rest of the world stagnated.

But a lag in building much needed infrastructure and a corrupt beaurocracy is catching up on the country. And a growing import bill and smaller returns on its commodity exports is weakening its position so much so that the trade deficit is almost hitting $US10 billion.

It's the kind of number that doesn't instil confidence, and also drives away foreign capital, the very thing Indonesia needs.

SURYO SULISTO, INDONESIAN CHAMBER OF COMMERCE AND INDUSTRY: It requires some really tough decisions, and prudent economic policies that would encourage growth, thus making business back to normal again.

CHATIB BASRI: The government is looking at this issue seriously. And we are in every step to overcome and to mitigate the impact of the global turbulence that's happening of quantitative easing. We are in every step to improve the structural problem in the current account deficit.

HELEN BROWN: Like many emerging economies, Indonesia has suffered as confidence in the US recovery has improved.

Indonesia's Central Bank continues to move large amounts of its own foreign currency reserves into the system to prop up the rupiahs value.

AGUS MARTOWARDOJO, GOVERNOR, BANK OF INDONESIA (translation): I welcome the policies, and I promised the government that I would keep coordinating and providing input both for the central and local government so that the macro-economy will be stabilised.

HELEN BROWN: Observers stress that communication will be the key.

BEN BINGHAM: They want clear, simple signals from Bank Indonesia as to how it's going to support the adjustments, the inevitable adjustments in my view, in rupiah assets. It's happening globally.

HELEN BROWN: The rocky week saw parallels being drawn with the Asian financial crisis of the late 1990s. Experts say the country's reformed enough to not be drawn into the same scenario. The Central Bank holds significant reserves and there's more regulatory oversight.

However Bank Indonesia has a big job on its hands. During the week it raised the benchmark interest rate again by a hefty 50 basis points.

DIFI JOHANSYAH, BANK INDONESIA SPOKESMAN (translation): This is the interest rate that we believe is in line with the current situation related to the weakening of the rupiah. This is our response to the pressure from inflation and the possibilities of imported inflation which happens because of the weakening exchange rate.

HELEN BROWN: There's since been some respite on the markets and currency, and government and policy-makers say they have a handle on the situation. But there's still a way to go before that can proven.
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