Wed, 14 Apr 2010

Jakarta (ANTARA News) - Rising private consumption and investment will allow the Indonesian economy to grow by 5.5 percent in 2010 from 4.5 percent last year, according to the Asian Development Bank (ADB)`s annual flagship economic publication.

The global economic recession had only had a moderate impact on the Indonesian economy, ADB in its Asian Development Outlook 2010 (ADO 2010) released Tuesday, said.

"Economic activity is forecast to quicken this year and return to the pre-recession levels of 2011, based on increasing domestic demand and supportive macro economic policies," ADB said in its press release.

Despite the achievements, raising investment in infrastructure and generating enough jobs remain major challenges.

Growth slowed during the global recession, but not precipitously, reflecting the economy's relatively low dependence on exports (equal to 30% of 2008 nominal GDP) and large domestic market.

The good harvests, an appreciating rupiah, and lower global food and fuel prices paved the way for inflation to abate to its lowest in almost a decade.

Inflation decelerated from 12.1 percent year-on-year in September 2008 to 2.8 percent in December 2009, averaging 5.0 percent in 2009.

The unemployment rate declined slightly from 8.1 percent in February 2009 to 7.9 percent in August 2009, but employment in the formal sector increased by just 0.8 percent, or 260,000 jobs in this period.

Lower food inflation and government cash payments for poor households in early 2009 contributed to a decline in poverty incidence by about 1 percentage point to 14.1 percent in the 12 months to March 2009.

As inflation and economic activity slowed, Bank Indonesia, the central bank, lowered its policy interest rate by 300 basis points from November 2008 to August 2009 to 6.5 percent.

However, because commercial banks lagged in reducing their interest rates, these cuts had little impact on lending. Growth in credit slowed to about 10 percent in 2009, and growth in broad money supply eased to 12.4 percent by year-end.

Financial indicators strengthened as the year progressed. The rupiah appreciated against the US dollar by 18.2 percent in 2009, recovering from a depreciation in late 2008. Capital inflows picked up, along with the economy, from March.

Yields on government bonds fell significantly, stock prices climbed, and credit default swaps returned to levels seen before the crisis.

Investment will strengthen in light of better global trade and financial conditions, the country`s record of solid growth, and the upgrades in its credit rating.

Foreign direct investment is expected to rebound and domestic investment will be encouraged by the quickening pace of economic activity, tax breaks, a better market for raising equity capital, and improved credit availability.

Fixed capital investment is forecast to grow by at least 6 percent in 2010, accelerating to about 9 percent in 2011. Net exports are expected to make a relatively small contribution to GDP growth in the forecast period, given that higher exports of goods and services will be accompanied by higher imports.

Based on the above factors, GDP growth is forecast to rise to 5.5 percent in 2010 and about 6.0 percent in 2011. Growth may exceed this if the government can accelerate its rollout of infrastructure investment, according to ADB.

In value terms, merchandise exports in January 2010 soared by 59 percent, and imports by 45 percent, from depressed levels in the prior-year month.

For the full year, exports are forecast to rise by about 11 percent, based on the forecast increase in world trade and firm prices for commodity exports. Stronger domestic demand will propel imports by about 16 percent, ADB predicted.