Bank Indonesia sees inflation up at 9%-11%

Bank Indonesia sees inflation up at 9%-11%

JAKARTA (JP): Bank Indonesia expects inflation this year to be
between 9 percent and 11 percent, higher than the initial target
range of between 6 percent to 8.5 percent, and predicts a weaker
economy in the second semester due to persistent uncertainties
and risk factors.

Bank Indonesia said on Friday that the continued weakening of
the rupiah, coupled with government pricing policies, including
on fuel, had driven prices upwards.

Since March, the year on year inflation rates have reached 10
percent, the central bank said.

"Bank Indonesia sees an inflation rate forecast of between 9
percent and 11 percent as a realistic scenario," the central bank
said in its second quarter economic report.

But it added the target range depended on the government's
ability to improve the supply and distribution chain of products
and on economic reforms.

Proper implementation of economic reforms will help regain
business confidence and reduce uncertainties and risk factors,
Bank Indonesia said.

Economic growth, it said, is likely to be in the neighborhood
of 3.5 percent this year, less than the previous target of
between 4.5 percent and 5.5 percent.

The bank said the revised economic growth rate rested on
expectations that the economic weaknesses in the previous two
quarters were likely to extend through the rest of the year.

It said the country's economy had slowed down in the second
quarter, as it grew by only between 3 percent and 4 percent
compared to 4.1 percent during the first quarter.

"In the second quarter, the economy was still able to grow
albeit at a slow pace," the central bank said.

Bank Indonesia blamed the slow down on the country's heated
political situation, slow corporate and foreign debt
restructuring, the uncertainty about the relations between the
government and the International Monetary Fund (IMF) and on the
still crippled intermediary role of the banking sector.

These factors have raised the cost of economic transactions,
thus slowing down investments.

It said that risk factors, caused by political and other
economic uncertainties, posed a greater harm to investment
activities than the impact of higher lending rates by banks.

Throughout the second quarter investment grew by only 7.5
percent compared to 10.2 percent in the first quarter, it said.

On the demand side, the bank estimated consumption and export
growth to remain the driving force of the economy.

However, export growth had weakened to 8 percent in the second
quarter, as against 11.7 percent in the first.

On the supply side, Bank Indonesia cited declines in the
manufacturing, trading, service and mining sectors.

But growth in the agriculture and construction sectors fared
better in the second quarter than the first one.

For the entire year, export would remain sluggish partly as
several Indonesian export markets were hit by an economic
slowdown.

"Although export could still rise on a weaker rupiah,
slackened domestic investment and production uncertainties have
reduced foreign demand (for Indonesian products), which in turn
hampers exports," the bank said.

Bank Indonesia further estimated that pressure on the rupiah
is likely to continue throughout the third quarter.

"This is because of continued political uncertainties and the
persistently thin foreign currency market," the bank said.

However, it expected improvements on the political front to
bring the rupiah's average rate for this year to a range of Rp
9,800 to Rp 10,600 against the U.S dollar.

The stage budget assumes an average rupiah rate of Rp 9,600 to
the dollar.

Bank Indonesia said the plunge in the rupiah value came on the
back of speculation and poorer market expectation on the local
unit.

It said the rupiah's prolonged depreciation had created a
spiraling effect, increasing financial risks and consequently the
cost of economic transactions.

Commenting on the banking sector, Bank Indonesia said it would
provide banks with an exit policy if they failed to meet the
minimum capital adequacy ratio (CAR) of 8 percent by Dec. 31.

"This mechanism (exit policy) will grant banks additional time
to meet the CAR requirement," the bank said.

Under the policy, non-publicly listed banks have another three
months, and listed banks six months to raise their CAR levels.

Banks deemed as strategically important would be allowed to
add one more month, on top of the three or six months period, the
bank said.(bkm)