Better economic outlook

Better economic outlook

Most analysts foresee a much rosier economic situation for
Indonesia next year. Barring any extraordinary external shocks or
adverse political incidents, the country's economy is predicted
to grow by a respectable rate of minimally seven percent,
compared to an estimated 6.5 percent to 6.7 percent this year.

The fundamentals of the economy are assessed as fairly sound.
The agricultural sector that contributes more than 18 percent to
the GDP is expected to perform better, as are the construction,
manufacturing, telecommunications, gas and electricity industries
and most other sectors.

But the bullish projections are by no means reason for
complacency. The caveat is that the upbeat outlook could take a
reverse trend even at the slightest change in some of the
assumptions underlying the projections.

The inflation rate may hit the much-dreaded double digit
level, as high as 10 percent. But the real impact may be mostly
psychological because the government has repeatedly pronounced
its determination to keep the rise in the consumer price index at
a single-digit level. True, the inflation was checked at a
single-digit last year, at precisely 9.77 percent. Even if the
general price rise reaches as high as, or almost, 10 percent this
year, the 0.23 percent point difference may not be so significant
at all. But if the inflation rate continues at the high range of
the single digit level, macro-economic management will become
more difficult.

Another problem is how the central bank will manage the
floating of the rupiah rate to make the rate favorable to
maintaining the price competitiveness of Indonesian exports. Many
analysts saw the depreciation rate of about 2.3 percent last
year, when the inflation rate was 9.77 percent, as too low. In
the first 10 months of this year, the rupiah rate against the
U.S. dollar depreciated only by around three percent. The
question is whether the central bank will continue to curb the
depreciation rate, to a much lower level than the inflation rate
warrants.

Reducing the inflation rate amid the robust economic growth is
perhaps one of the biggest challenges for the government next
year because that also will influence bank interest rates. Some
analysts, observing the persistently high incremental capital
output ratio in the country, contend that the anti-inflation
drive requires not only the right fiscal and monetary measures,
but also more concerted efforts to further improve the overall
efficiency of the economy.

Improving export competitiveness is seen as crucial as well.
The exports of non-oil products, which account for more than 75
percent of total export earnings, will not likely achieve the
target growth of 16 percent. Most estimates put the export growth
this year at 13 percent and, without significant improvement in
the export competitive edge and diversification in export
products, next year will not likely promise a better performance.

That trend is worrisome indeed because the import growth is
expected to remain high at 15 percent, especially because of the
dramatic increase in the amount of licensed investments this
year. That makes a higher export growth even more imperative,
otherwise the balance of payments will be subject to strong
pressures with the adverse implications for monetary stability. A
higher export growth is also required as a hedge against any
external shocks such as a sharp currency realignment, notably the
dollar-yen rate.

So all in all, the rosy forecasts on the economy are based on
assumptions which require consistency on the part of the
government with regard to its economic and bureaucratic reform
measures. Moreover, extra caution also is in order because many
of the assumptions are highly vulnerable to external factors
which are beyond the government's control.