Consumption remains the growth backbone

Consumption remains the growth backbone

The Jakarta Post, Asia News Network, Jakarta

Indonesia's economy is once again at a crossroads as it enters
the second half of the year. Can it sustain the growth it enjoyed
in the first two quarters, or will it experience a slowdown due
to recent unfavorable circumstances?

On one hand, consumption is still expected to grow the rest of
the year and maintain its function as the main economic driving
force. Investment and exports are also expected to grow on the
back of a better infrastructure and investment climate,
contributing more to the country's gross domestic product (GDP).

On the other hand, the recent global oil prices at US$61 per
barrel and the weakening rupiah against the U.S. dollar can push
up the inflation rate, thus hurting consumers' purchasing power.

The central bank's decision to maintain its tight monetary
policy by increasing its benchmark interest rate to curb the
rising inflation could further hurt consumer spending, as banks
will tend to raise their interest rates as well, making
commercial and consumer loans more costly.

Indonesia's economy grew by 6.35 percent on an annual basis in
the first quarter, down from the 6.65 percent GDP growth in last
year's final quarter.

Official data on the country's economic growth in the second
quarter this year is not yet available, but the preliminary
assessment of central bank, Bank Indonesia (BI), was that it
stood at between 5.5 percent and 6 percent. BI expects growth to
reach 5.9% by the end of the year, while the government hopes to
see a GDP growth of 6 percent.

A consumer survey by BI last month, surveying 4,300
households, revealed that consumers still have a positive outlook
on the economy. Most of them see their income possibly rising, or
at least remaining at the same level, over the next six months.

This indicates that consumer spending should remain strong, or
even rise, in the third quarter.

The trend in robust consumption is reflected inassessment of
the country's banking industry which showed that consumer loans
in May -- including car and house loans as well as credit card
transactions -- increased by 38.42 percent from the same period
last year.

In comparison, bank loans for investment and corporate capital
expansion only grew by 17.46 percent and 29.84 percent
respectively in the same period.

BI data shows that bank loans reached a total of Rp 560.8
trillion ($57.3 billion) as of February, of which more than a
quarter were consumer loans.

The rising trend in consumer loans is expected to continue in
the third quarter, as most banks still consider such loans
promising in terms of generating revenue in the short term.

The consumer survey, however, also revealed that most
consumers still see inflation and interest rates set to rise in
the future, prompting them to put on hold their plans to purchase
durable goods -- houses, furniture and vehicles -- until next
year.

These factors could in the end also weaken consumption in the
third quarter.

Indonesia's on-year inflation had shot up to 8.81 percent in
March following a fuel price hike, although it started to ease.
Inflation began picking up again to 7.42 percent in June, or 4.28
percent throughout the year's first semester.

The government is expecting an on-year inflation rate of 7.5
percent.

Credit interest rates during the second quarter, meanwhile,
are estimated to have reached between 6.28 percent and 11.75
percent for rupiah-denominated loans, and between 0.94 percent
and 4.51 percent for loans in foreign currencies.

Both figures show a rise in interest rates from the first
quarter, which stood at between 6.16 percent and 11.47 percent
for rupiah loans and between 0.84 percent and 4.21 percent for
loans in foreign currencies.

Deposit interest rates, meanwhile, stand between 5.04 percent
and 7.65 percent for rupiah savings, and 0.61 percent to 2.61
percent for foreign currency savings.

The rising inflation rate has prompted BI to continue raising
its benchmark interest rate to 8.5 percent, which will stand
throughout the third quarter.