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)

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