A global economic slowdown, affected by high oil prices and the weakening U.S. economy, may cause Indonesia's economy to plateau at 6.3 percent growth next year, speakers at a seminar on the economic outlook say.
High oil prices, which reached US$98 per barrel last month, could cause a global economic slowdown, if the subprime mortgage crisis in the United States is protracted, a senior analyst at the Institute for Economic and Financial Development (Indef), Mohamad Ikhsan Modjo, said.
Surging oil prices, he said, would force the government to increase subsidies for domestic fuels. The rise would also affect industries as local companies, which buy non-subsidized fuel, would have to pay more for production and transportation.
"The increase in oil prices has been basically caused by increasing global demand, while production capacity is limited, besides a worsening geopolitical situation in the Middle East," he said, referring to the average annual increase to global oil demand of 1.5 percent a year.
He said the rise in oil prices was worsened by the U.S. subprime mortgage crisis, which had caused financial difficulties for many banks.
He said the crisis could spread to Europe and Asia because of interrelated financial assets and systems in the global capital market.
"If the subprime mortgage crisis in the United States leads to an economic recession, Indonesia will be likely to get dragged into the same hole."
Ikshan said, based on World Bank estimates, every 2 percent drop in U.S. economic growth could weaken the Indonesian economy by 1 percent.
In 2008, Ikhsan suggested the government be careful with high inflation. Indef predicts next year inflation may climb from 6.33 up to 6.42 percent.
Despite the possibility of a global slump, Indonesia's economic base remains strong as domestic consumption and investment will likely continue to increase, he said.
Standard Chartered Bank senior economist Fauzi Ichsan echoed the Indef predictions about the rising oil price, the U.S. crisis and strong domestic consumption and investment.
"Investors, especially financial investors who play in the capital market, will continue to enter Indonesia simply because it is an emerging market with political stability," he said.
He said investments in agriculture, like oil palm plantations, were very promising, as were infrastructure, finance and consumer goods production. (ind)