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)