Economic outlook remains gloomy despite 2.6% growth

JAKARTA (JP): Although economic growth in the first quarter of this year fulfilled the market's expectations, many economists warn that the outlook for the rest of the year is much more gloomy.

They said that unless the current domestic political instability was resolved, 2001 economic growth might be even lower than the government's new target of around 3.5 percent.

"I'm pessimistic that the government's growth target can be met if the current uncertainties are not eliminated," Gadjah Mada University economist Sri Adiningsih said.

The Central Bureau of Statistics reported on Friday that the economy grew by 2.6 percent in the first quarter of this year from the fourth quarter of last year, mainly due to rapid growth in the agricultural sector.

Danareksa Research Institute chief economist Raden Pardede said that growth in the agricultural sector was seasonal, and a slowdown was expected in the coming months as the harvest period ended.

"What we need to see now is how the manufacturing sector will perform," he said, adding that it had been considered one of the main factors driving the economy.

He explained that since growth in the manufacturing sector last year was mainly driven by exports, the sector would likely perform poorly with the expected economic slowdowns in the U.S. and Japan, two of Indonesia's most important traditional export markets.

He added that new investments, particularly in durable goods, could not be expected given the current domestic political uncertainty.

He said that with the prospect of a severe state budget deficit, the government could not be expected to provide any new economic stimulus.

"So, looking at the demand side, both domestic and external, economic growth will be slower in the second and third quarters," Raden said.

"Our (economic growth) forecast for the full year is 2.8 percent to 3 percent," he added.

If compared with the January-March period of last year, the economic growth in this year's first quarter was 4.1 percent, within the government's target. But the uncertainty in the investment climate and the gloomy outlook in the country could cause a slowdown in overall economic activity in the coming months.

Sri Adiningsih said investment and exports, which were the main engines driving the country's 4.8 percent economic growth last year, would make a lower contribution to this year's gross domestic product (GDP).

After a sharp economic contraction of about 14 percent in 1998, the economy managed to register relatively flat growth in 1999 and a stronger-than-expected 4.8 percent growth in 2000.

But the country is now losing this economic momentum as political instability scares off investors and sends the rupiah tumbling and interest rates soaring.

Analysts have warned that it is crucial for the country to register minimum economic growth of 3.5 percent this year. They say this is necessary to provide a sufficient basis for higher growth in the coming years, to help absorb the massive number of unemployed and to avoid a new round of social unrest.

Minister of Finance Prijadi Praptosuhardjo told legislators early last week that if the country's current uncertainties could at least be overcome gradually, the economy could grow by 3.5 percent this year and by an average of 5 percent to 6 percent from 2002 to 2004.

But he warned that if the uncertainty dragged on, Indonesia could tumble into a deeper crisis.

Embattled President Abdurrahman Wahid has been facing growing calls to resign and hand over power to his popular Vice President, Megawati Soekarnoputri. Particularly strident in calling for Abdurrahman's resignation have been legislators, who recently issued a second censure against the President for his alleged involvement in two financial scandals.

The political fate of Abdurrahman may be decided in August, when the People's Consultative Assembly, the country's top law- making body, may convene a special session to begin impeachment proceedings against him.

The sharp drop in the rupiah and soaring domestic interest rates may cause the 2001 state budget deficit to widen to a critical 6 percent of GDP, compared with the initial projection of 3.7 percent of GDP.

The government recently announced plans to raise fuel prices by an average of 30 percent, electricity rates by 20 percent and value added tax by 2.5 percent in a bid to limit the budget deficit to the safer level of 3.7 percent of GDP.

The House has yet to approve the plan. And some observers fear these hikes, particularly the increase in fuel prices, could trigger social unrest if the government fails to win public support for the move and insulate the poor from the brunt of the impact of this new policy.

Several businesspeople said earlier these price hikes could send more companies into bankruptcy, with many businesses already suffering under recent increases in fuel prices and power rates, as well as the sharp drop in the rupiah and rising interest rates. (rei)