'Domestic consumption robust, will drive growth'
Dadan Wijaksana, The Jakarta Post, Jakarta
As a continued slump in investments and exports seemed inevitable, the country's economy would still be relying on domestic consumption as its main driving force at least for another year, a noted analyst said.
Sri Mulyani Indrawati, an economist at the University of Indonesia, said Tuesday that domestic consumption would remain robust, becoming yet again the prime mover of economic growth, despite a declining trend in consumer confidence.
"Data from BPS (Central Bureau of Statistics) and Bank Indonesia suggested that consumer confidence has been declining since the fourth quarter of last year. But on the other hand, a stronger rupiah makes people -- psychologically speaking -- tend to buy things.
"So, if the rupiah can be maintained at a level below Rp 9,000 as it is now, this can compensate for the eroding trend in consumer confidence," Sri told reporters on the sidelines of a seminar on the economy.
A survey conducted in June by Bank Indonesia, showed that the Consumer Confidence Index (CCI) was flat in May at 73.5 compared to 73.4 in April.
The central bank said a number of other indices also failed to show any significant progress during the month, further indicating a negative outlook on the economy on the part of consumers.
As a consequence, consumers were still reluctant to buy durable goods as indicated in the Consumer Spending Index, which rose only slightly to 62.8 from 60.5 the previous month.
Increases in the prices of goods and their low purchasing power were believed to be the main reasons for not purchasing durable goods.
As the performance in investments and exports have been far from encouraging, this only raised concerns of an even bleaker economic outlook as the country is running out of its economic growth engines.
Approvals for direct investments, both foreign (FDI) and domestic, during the first five months of the year fell by 59 and 30 percent, respectively, compared to the same period posted in 2001, due mostly to the unfavorable business climate.
As of May, FDI approvals stood at US$ 1.67 billion, far below $3.98 billion posted during the same period last year.
Approvals for domestic investment during the January to May period dropped from Rp 12.7 trillion in 2001 to Rp 9.4 trillion this year.
The country also experienced an almost 10 percent drop in exports in May compared to the same period the year before.
While admitting that the government made little progress in improving investment and exports, Sri was convinced that the country's economy would grow by around 4 percent this year as targeted on the back of strong consumer spending.
"It's obvious that consumption will remain robust, the question is, for how long? as long as we can maintain the stability of the rupiah," Sri added.
Maintaining the stability of the rupiah is crucial as it would also slow down inflation, meaning a greater chance of Bank Indonesia lowering its benchmark interest rate.
A slower inflation rate would do little to the people's purchasing power, while a lower interest rate means it would be more beneficial for the people to spend their money on durable goods as a form of investment rather than saving at banks.