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.