Sat, 05 Dec 2009
From:
Michael Dwyer

Indonesia can’t replicate the economic growth of China and India because of impediments to investment such as corruption and high credit costs, according to Credit Suisse Group.

“We don’t expect investment to take off,” Cem Karacadag, an economist at Credit Suisse in Singapore, said in a report received on Thursday.

“It will take the government many years to fix the structural obstacles to investment, including corruption, regulatory risks, and a weak legal framework.”

President Susilo Bambang Yudhoyono’s re-elected government has “neither the mandate nor the capacity” to implement quickly the reforms needed to overcome these obstacles to investment, according to Credit Suisse.

Borrowing costs are also too high, as the central bank isn’t committed to keeping monetary policy “stable and tight,” Karacadag said in the report.

Indonesia wants to be included among the so-called BRIC nations of Brazil, Russia, India and China, according to Emil Salim, an adviser to Yudhoyono and a former cabinet member.

The nation’s accelerating growth provides a case for its inclusion among BRIC economies, Morgan Stanley said in June.

However, Credit Suisse said it was likely that gross domestic product growth in Indonesia, Southeast Asia’s largest economy, would remain below that of China and India.

“The key question for Indonesia is will investment accelerate quickly and be efficient enough to lift GDP growth to high single digits?” Karacadag said. “Our answer is no.”

Still, Indonesia’s long-term economic outlook is “bright” and annual GDP growth may average 5.6 percent from 2010 to 2014 and 6.5 percent from 2015 to 2019, according to Credit Suisse.

That will see per capita income almost triple to $6,800 by 2019 from $2,300 in 2009, it said.

The country’s growth accelerated in the three months to Sept. 30 for the first time in five quarters, with GDP expanding 4.2 percent from a year earlier.

Consumer prices rose 2.41 percent last month from a year earlier, after gaining 2.57 percent in October.

“There is less pressure for Bank Indonesia to increase rates earlier in 2010 following Vietnam and Australia,” said Destry Damayanti, the chief economist at PT Mandiri Sekuritas.

“The central bank may maintain the benchmark rate at the current rate of 6.5 percent at least until the second quarter of 2010 before gradually increasing it to 7.25 percent.”

Bank Indonesia needs to show a stronger commitment in its fight against inflation in order to bring down borrowing costs to companies and consumers, according to Credit Suisse.

“The higher the rate of inflation, the higher are real lending rates because of the inflation risk premium that is built into nominal interest rates,” Karacadag said.

“It would only be much later, once tight and consistent policy has raised the credibility of the central bank, that the payoff would come in the form of lower real interest rates.”

Bloomberg



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