7% growth predicted for 1996

7% growth predicted for 1996

JAKARTA (JP): Foreign and local economists estimated yesterday that Indonesia's economic growth would continue to exceed 7 percent next year, despite the widening current account deficit.

Andrew Freris, an executive of the Hong Kong arm of the United States-based Solomon Brothers, estimated that Indonesia's gross domestic product (GDP) would likely grow by 8 percent next year, as compared with the 7.5 percent growth estimated for this year.

He warned, however, that the widening current account deficit would pose a stronger pressure to the country's economy if no measures were taken to boost exports and to limit imports.

Freris estimated the current account deficit would increase to US$5 billion this year, accounting for about 2.6 percent of GDP, from the estimated $3.1 billion in 1994.

"Although the deterioration in the current account is far from a crisis point, it is, nonetheless, worrying," he told executives in a presentation on the 1996 economic outlook of the Economic, Trade and Industry (Econit) advisory group.

Freris, the investment bank's director and chief regional economist, was reluctant to give his estimate on next year's current account deficit.

"I will be surprised if the number of the current account deficit will be below $5 billion," he said.

Freris estimated that the inflation rate would likely decline to 7.5 percent in 1996 from the estimated 9 percent this year.

Rizal Ramli, Econit's managing director, said that the widening current account deficit would become a major pressure on the country's economy next year.

Unlike Freris, he forecast that the current account deficit would more than double to $6.4 billion this year from the estimated $3.1 billion in 1994.

The signs of overheating in the country's economy would continue and the current account deficit would further widen to about $7 billion next year, Rizal said.

Even though Rizal's economic outlook for 1996 was less promising, he put the estimate for economic growth at above seven percent.

"Economic growth will reach 7.3 percent next year on the condition that the high current account deficit does not become a problem," he said.

He projected that the economy would grow by 7.5 percent this year.

Rizal said that the small decline in the GDP growth would have no significant impact on the country's overall economic activities.

Investment

Freris said that the realization of foreign investment commitments in 1995 and in the previous years would have a positive impact on the current account deficit.

Although the inflow of capital from the realization of foreign direct investments would not be very significant, its impact on the balance of payments would be positive, he said.

The upbeat outlook on the economy would keep the domestic stock exchange attractive, he said, adding that the prospects for 1996 would be enhanced if domestic interest rates fell.

However, he said that the widening current account deficit would cast a shadow over foreign portfolio investment, which now accounts for between 60 percent and 70 percent of the trading volume.

Like Freris, Rizal estimated the inflation would be checked at below 10 percent next year.

The two economists shared the view that the rupiah had been over-valued, making non-oil exports less competitive. They suggested that the central bank accelerate the depreciation of the currency to boost non-oil exports.

The growth of non-oil exports is estimated to increase by about 16 percent this year from 12 percent in 1994, while imports may increase by 18 percent in 1995.

Rizal said that exports of non-oil products are likely to rise by 16 percent next year if the monetary authority takes no measures to curb the over-valuation of the rupiah.

"If the government accelerates the depreciation of the rupiah, the growth of non-oil exports could even reach 20 percent next year," he said.

The value of the rupiah is floated in line with the developments of a basket of the currencies of Indonesia's 10 major trading partners.

A source at the central bank said that the 4 percent depreciation of the rupiah against the dollar this year will maintain the competitiveness of the country's exports.

"The rupiah is still undervalued, according to our formula," the source said, adding that the competitiveness of the country's products should not rely merely on the monetary instrument.

Measures should also be taken to improve the efficiency of industrial activities, the source said. (hen)