Aceh tsunami only slightly affects economy

Aceh tsunami only slightly affects economy

Phelim Kyne, Dow Jones, Jakarta

Indonesia's economy won't suffer much from the impact of the earthquake and tsunami that devastated northwestern Aceh province, a Deutsche Bank AG (DB) senior economist said on Wednesday.

Aceh generates only a small fraction of Indonesia's gross domestic product, while reconstruction loans, donations and debt relief will cushion the economic fallout of the Dec. 26 disaster, said Michael Spencer, the bank's chief economist for Asia.

"Aceh province as a whole accounted for 1.6% of GDP, and the economic impact in terms of GDP growth particularly will be very small since reconstruction will provide a burst of activity in construction and other services," Spencer told Dow Jones Newswires.

Spencer spoke on the sidelines of the official release of the Indonesia section of Deutsche Bank's Asia 2005 Outlook. His comments echo the assessments of other analysts who note that Aceh's key industrial sector, liquid natural gas production facilities such as those of Exxon Mobil Corp. (XOM), weren't harmed by the tsunami.

Conversely, domestic cement and heavy equipment producers, including Semen Gresik (SMGR.JK) and Komatsu Indonesia (KOMI.JK), and will reap a windfall in new business from Aceh reconstruction efforts, analysts predict. Domestic life insurers are also expecting an uptick in policy sales from an Indonesian public more mindful of the need for protection from unpredictable risks.

Indonesia's total tsunami-related economic damage and losses are estimated at US$4.5 billion, Sri Mulyani Indrawati, state minister of national development planning, told international lenders on Wednesday. That represents 2.3 percent of Indonesia's GDP and 97 percent of Aceh's annual economic output.

But Jakarta insists international relief and reconstruction aid will allow the government to achieve a pre-tsunami projection of 5.5 percent economic growth this year. That would be an acceleration from estimated 4.8 percent growth in 2004. Foreign governments and multilateral lenders have already pledged about $5 billion to Indonesia and other tsunami-affected countries, including Thailand, Sri Lanka and the Maldives.

Some analysts have warned of the possibility that Indonesia might get unintentionally hurt by aid from creditor governments if they suspended debt payments but attached conditions, such as requiring Indonesia to negotiate similar terms with private creditors. Such "comparability" conditions could hurt Indonesia's credit rating and make it harder for Jakarta to borrow money.

But Spencer said it's unlikely that planned debt relief for tsunami-hit nations by the Paris Club of donor countries will impose such counterproductive conditions.

"I think the most likely thing is the Paris Club will allow the Indonesian government to negotiate bilaterally so there's no risk that it triggers" comparability, Spencer said. "The Indonesia government has made it clear that if (comparability) conditions are part of the offer, they aren't interested. And that's the right approach to make."

An infrastructure investment summit in Jakarta this week gave the government "a tremendous opportunity" to rejuvenate flagging private and foreign investor interest in the country, Spencer said.

Approved foreign direct investment in Indonesia fell 26% last year as investors headed for the exits due to a combination of perceived rampant corruption, poor infrastructure and an unpredictable judiciary.

At the summit the government unveiled 91 infrastructure investment projects in areas ranging from toll roads to telecommunications valued at around $22 billion.