ADB revises up growth forecasts for Indonesia

ADB revises up growth forecasts for Indonesia

JAKARTA (Reuters): The Asian Development Bank said on Tuesday it had revised up its estimates for Indonesian economic growth but warned sustained recovery was critically dependent on economic reforms and a smooth political transition.

"Given the favorable developments in the macroeconomic situation during the first half of this year, the GDP growth forecast for 1999 is being revised upward from zero to about two percent," the ADB said in an updated economic outlook.

It forecast four percent growth for 2000.

Indonesia's latest letter of intent, agreed with the International Monetary Fund, forecast GDP growth of 1.5 percent- 2.5 percent in the fiscal year to end-March. The government said last month Indonesia had the potential to grow two to four percent in the current fiscal year and four to six percent the following year.

But analysts polled by Reuters on average saw GDP dipping 0.3 percent this year, after contracting 13.7 percent in 1998, and growing by 3.3 percent in 2000.

The ADB said it was cutting its 1999 inflation forecast to 12.0 percent from 15 percent-20 percent, and predicted 10 percent inflation in 2000.

"Sustaining Indonesia's recovery will depend critically on continued commitment to economic reforms and a smooth political transition period," the ADB said.

In June, Indonesia held its first democratic parliamentary elections in more than four decades. In November, the 500 members of parliament plus 200 appointed officials will choose the country's next president.

The ADB said Indonesia's catastrophic economic crisis seemed to have bottomed out, and there were "signs of a recovery after nearly two years of financial and economic turmoil".

It said the restructuring of Indonesia's state banks was crucial to the restoration of a functioning sector. The Indonesian Bank Restructuring Agency (IBRA) would have to accelerate the recovery of non-performing loans to keep the costs of bank recapitalisation manageable, it said.

The ADB said gains by the rupiah had encouraged more companies to reach debt restructuring deals, but "more rapid progress in this area and the effective implementation of the bankruptcy law are necessary for handling corporate restructuring".

Indonesia also "faces a daunting agenda of governance and anticorruption reform, both in the short term and the medium term", the ADB added. "Sustained effort over a long period of time will be needed to address these deep-seated problems."

Asia

The ADB said on Tuesday it had raised its economic growth forecasts for Asia, but it sounded notes of caution on the political situation in Indonesia, Y2K compliance, and the slow pace of reforms.

In its Asian Development Outlook Update, the Manila-based lending agency said average economic growth in developing Asia, which it defined as the region minus Japan, could reach 5.5 percent in 1999 and 2000. I n April, the bank had forecast 4.4 percent growth in 1999 for the region and 5.1 percent growth in 2000.

Globally, the ADB said there was a clear prospect the downturn in 1998 that saw world GDP growth declining to 2.5 percent as compared to 4.2 percent in 1997 had been arrested.

It said the rate of world GDP growth in 1999, supported by a stronger-than-expected Asian recovery, was expected to move above 2.5 percent and to improve to about 3.5 percent in 2000.

Among the countries in the region, South Korea is expected to post the biggest growth in 1999 with GDP up eight percent on a year earlier. Taiwan, Singapore, Philippines and Thailand follow, the ADB said.

China's growth, thought still high, is forecast to slow as the pump-priming of its economy through expansionary fiscal policy starts to lose its effectiveness, the bank said.

From GDP growth of 7.8 percent in 1998, China's growth will slow to 6.8 percent in 1999 and six percent in 2000, it said.

South Asia, which escaped the wrath of the regional crisis along with China, is expected to post steady growth, with India's gross domestic product seen posting year-on-year growth at seven percent each in 1999 and 2000, higher than previously forecast.

The ADB said inflationary pressures in the region would remain subdued due to improved agricultural sector performance and excess industrial capacity.

Year-on-year inflation in developing Asia is seen at one percent in 1999 and 3.1 percent in 2000, substantially below the previous forecasts of 3.7 percent in 1999 and 3.1 percent in 2000.