Economist predicts lower growth, higher inflation

Economist predicts lower growth, higher inflation

JAKARTA (JP): Indonesia will see lower economic growth and
higher inflation this year and the next due to the currency
turmoil and the prolonged dry season, economist Mari E. Pangestu
said yesterday.

Speaking at a seminar hosted by financial services firm Ernst
& Young, Mari said growth would drop to between 5 percent and 6
percent this year and next year, from 7.8 percent in 1996.

Inflation would increase to between 7 percent and 8 percent
this year and next year, from 6.4 percent in 1996, she added.

"Frankly speaking, I suspect no one would really invest before
the 1998 presidential election and the new cabinet formation.
That means growth will slow down," Mari said.

The postponement and rescheduling of government projects will
also affect growth.

Companies and banks will have to deal with losses due to the
sharp rupiah depreciation and will therefore have to consolidate
themselves for at least the next 12 months.

"Household consumption will also weaken because of the
weakening of the rupiah and high interest rates," she said.

Other driving forces behind last years' high economic growth,
like agriculture and property sectors, would also weaken, said
Mari, a senior economist for the Centre for Strategic and
International Studies (CSIS).

The agricultural sector would be severely affected by the
current prolonged dry spell and the property sector would be
stagnant as demand for housing decreased due to high interest
rates.

"The only positive factor for growth would come from exports
as they would benefit from rupiah depreciation," said Mari, CSIS
executive director.

Exports of resource-based products such as agricultural and
processed food products and wood-based products such as pulp and
paper are expected to soar.

Meanwhile, exports with high import content like textiles,
footwear and electronics will not gain much from the weakening
rupiah.

Mari also predicted that inflation would rise to between 7
percent and 8 percent this year and next year due to the
prolonged dry season and the possibility of electricity rate and
fuel price increases.

"This year's drought will affect prices early next year as
agricultural output will drop significantly," she said.

Even in the next five years, inflation would not touch the
government's target of 5 percent per annum because of
distribution bottlenecks and natural disasters like drought and
floods.

In the short-term, price increases would be corrected by the
slump in demand as a result of high interest rates.

She predicted that interest rates would remain temporarily
high and would only gradually decrease.

Rupiah would stabilize at around 3,000 against the U.S. dollar
for the next three months and after that it could strengthen
provided the government implemented its reform program and
regional sentiments improved.

Stock markets would continue to be volatile in the next three
months as most investors would prefer investing their funds in
fixed income instruments to stocks, Mari said.

Rupiah and stocks

The rupiah strengthened against the U.S. dollar yesterday as
stock prices on the Jakarta Stock Exchange lost 1.7 percent,
foreign exchange dealers and stock brokers said.

Spot rupiah closed up at 2,930/2,936 from an opening of
2,950/2,960 in a very thin market as most banks did not open new
positions at the weekend, dealers said.

The Jakarta Stock Exchange composite index, the main price
indicator on the exchange, dropped by 9.499 points to close at
546.637.

Securities dealers attributed the decline to heavy selling
pressures by foreign investors in the market.

"Most foreign investors are net sellers now," said a dealer
with a joint venture brokerage firm.

Head of the research division at Sigma Batara Securities,
Fadjar Limin Sutandi, said investors expected the government to
launch another policy to stimulate the bearish market.

"The government has lowered rates for the central bank's
short-term SBI papers, but investors want it to be lowered
further and quickly," he said.

Head of research at Pentasena Securities, Mohammad Syahrial,
shared Fadjar's view and said the main concern now was the
currency, the SBI and swap rates.

"If these are dealt with properly, the market will definitely
improve," he said.

Bank Indonesia, the central bank, yesterday kept interest
rates for bilateral SBIs unchanged. The bank offered one-month
SBI at 25 percent, three month at 23 percent, six month at 12.125
and one-year at 12.75 percent.

A local bank dealer said the central bank might cut its SBI
rates again next week.

"The market has already anticipated SBI rates would be cut
further next week. Therefore, we saw a lowering swap premium
today," he said.

One-week swap edged down to 11/13 points from 17/19. Two-week
swaps were at 20/28, one-month at 43/49, two at 75/90, three at
100/130, six at 220/235 and one-year at 390/430 points. (aly/rid)

Currency -- Page 11