Fri, 15 Aug 2008
Published: August 14 2008 17:01

Indonesia’s economy grew a higher-than-expected 6.39 per cent year-on-year in the second quarter of this year, thanks to high commodity prices, strong consumer spending and robust exports.

The figures will give a boost to President Susilo Bambang Yudhoyono as he unveils the government’s 2009 budget on Friday. Ministers say this will include a 55 per cent increase in funds for poverty alleviation programmes and a significant expansion of the education budget.
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Yet although growth exceeded most analysts’ predictions by about 25 basis points and the first quarter’s result by 7 basis points, most economists believe that Indonesia needs annual growth of at least 7 per cent to absorb new entrants to the labour market in the world’s fourth most populous country.

Economic growth in south-east Asia’s largest economy has fallen short of that level for a decade, reaching 6.3 per cent last year. The government is targeting 6.2 per cent for both this year and next.

The International Monetary Fund, in its annual assessment, this week, “welcomed the resilience of the Indonesian economy to the global slowdown and financial market turmoil, underpinned by strong macroeconomic fundamentals and the highly liquid and well-capitalised banking system”. It forecast growth would reach 6.3 per cent next year.

Nick Cashmore, of CLSA brokerage in Jakarta, said Indonesia had been “exceptionally lucky” because of high prices for coal and other commodities. “If this rising investment cycle picks up, [Indonesia] has the potential for insular growth that will set it apart from its neighbours,” he said.

Exports accounted for 30 per cent of growth in the second quarter, far lower than in neighbouring countries, while consumer spending represented 60.3 per cent. Quarter-on-quarter growth was 2.44 per cent, compared with 2.19 per cent in the first quarter.

Indonesia’s business confidence index rose to 114.55, its highest level for four years, indicating a strongly positive outlook, the national statistics agency said. A figure of 100 is considered neutral. Consumer confidence, however, fell to 93.84, its lowest level in three years, on the back of a 30 per cent fuel price increase in May and rising inflation.

Analysts believe a fall in commodity prices over the past two months will slow growth, but this will be partly compensated for by increased government spending on infrastructure, especially power. The finance ministry said this week the government had spent only 36.7 per cent of its 2008 budget in the first half of the year.

Sri Mulyani Indrawati, Indonesia’s chief economics minister, was upbeat. “The growth momentum is very strong and the upward trend on employment and poverty reduction is healthy,” she told the Financial Times. “The main worry is inflation. It will be a couple of months before the central bank and we get it down to single digits again.”

Ms Sri Mulyani said the budget deficit, likely to be about 1.9 per cent this year, would be expanded from her originally intended 1.5 per cent to fund the additional education budget.

This week the constitutional court ruled that, in line with the constitution, education spending must be 20 per cent of the government’s budget, a figure it has never reached in the last decade.



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