Bank Indonesia sees 2002 consumption growth slowing

Berni K. Moestafa, The Jakarta Post, Jakarta

Bank Indonesia announced on Tuesday that it expected consumption growth in 2002 to weaken from the impact of a high inflation rate, but said an upturn in exports and domestic investment might offset the drop and preserve the country's economic growth.

Assuming that domestic consumption remained robust, the central bank said Indonesia's economy could grow by 3.5 percent to 4 percent.

"The economic prospects for Indonesia in the year 2002 depends very much on the potency of growth of the domestic economy," Governor of Bank Indonesia Sjahril Sabirin told reporters, quoting the results from a meeting of the central bank's board of governors this month.

The government is betting on strong consumption growth to justify its prognosis that the economy will expand by 4 percent this year.

Export sales, which drove economic growth in 1999 and 2000, have fallen in line with the downturn in the global economy.

But as the country increasingly relies on local consumption, the sustainability of consumer spending has come under scrutiny.

Some economists believe the previous two years of strong consumption have been fueled by pent-up demand, which over the past few months has shown signs of fatigue.

"We expect consumption will not grow at the same rate as it did last year, but it will grow nonetheless," Sjahril said.

This would come based on the central bank's projection that inflation would remain high and hurt consumer spending.

The government-planned price hikes of key commodities such as fuel, power and telephone rates is expected to push inflation by one percent this month, from 0.33 percent the same month last year.

Inflation has also been spurred by a weaker rupiah, as it pushed up prices of products depending on imported raw materials.

Inflation for 2001 had been 12.55 percent, with the government hoping to contain the rate to nine percent this year.

Aiming for a low single digit inflation rate is difficult, according to Sjahril.

He said Bank Indonesia's inflation target, of between nine percent and 10 percent, was "reasonable enough".

As domestic consumption may not sustain its previous levels, Bank Indonesia expects to balance the fall from higher exports and domestic investment.

Sjahril said Indonesia could expect a late upswing in export sales this year, as the world economy is expected to recover, led by Indonesia's largest export destination, the U.S.

Several industry indicators in the U.S. point toward a recovery, which could come sometime in the second half of 2002.

On the investment side, Sjahril expected domestic investors to maintain their lead over foreign investors.

Government data shows foreign investment approvals as of last Oct. fell to US$6.5 billion, a near 50 percent drop from 2000.

By contrast, domestic investment approvals rose to Rp 71 trillion ($6.8 billion), up 61 percent in the same period.

Sjahril said small and medium size enterprises would likely continue to make up the bulk of investment made in this country.

"Of last year's loan commitments of Rp 122 trillion, much had come from small-and-medium-sized enterprises," he said.

As only Rp 47.7 trillion had been realized by last November, he explained, some of the approved loans would likely be realized this year.

Bank Indonesia deputy governor Maman Sumantri has said the realization of new loans this year might hit Rp 62 trillion, mainly on growing loan demands from small and medium enterprises.

Sjahril added that Indonesia could expect a larger investment boost, once large companies began borrowing again.

These companies had been the worst hit since the 1997 financial crisis bloated their foreign denominated loans in rupiah terms.

The Indonesian Bank Restructuring Agency (IBRA) took over the bad loans from local banks. Sjahril said that the return of the loans by the IBRA to the banking sector was crucial to revitalize large corporate investment activities.