Economist warns inflation in 2001 may surge to 14%

JAKARTA (JP): Inflation in 2001 could reach a worrying level of around 14 percent, much higher than the government forecast of 9.3 percent, due to a combination of the country's slower export performance and the recent increase in fuel prices and electricity rates, senior economist Suhadi Mangkusuwondo said on Friday.

Suhadi said that slowing exports could hit the country's foreign exchange reserves, which would in turn weaken the rupiah and trigger a cost-push inflation.

"Inflation in 2001 could surge to 14 percent particularly due to slower export performance," he told reporters during a gathering held to discuss the results of the latest Pacific Economic Outlook (PEO) for 2001/2002.

After registering a record 16.1 percent in export growth last year, the country's exports this year are expected to weaken significantly due to slower economic growth in the U.S. and other trading partners.

Suhadi explained that much higher inflation could further undermine the rupiah and trigger a higher interest rate environment, which would present a severe threat to the still weak banking sector.

"Let's just hope this will not happen," he said.

A weaker rupiah against the U.S. dollar would push up production costs as the country's production system depends heavily on imported raw materials.

The government has spent billions of dollars to recapitalize the country's banking sector, though it is still in danger of falling into a second crisis as the rising domestic interest rate is applying serious pressure on the margins and will present further difficulties in restructuring bad loans.

The benchmark interest rate of Bank Indonesia's one-month SBI promissory notes is currently hovering at 16.55 percent. The central bank has said that it would maintain its tight monetary policy amid inflationary pressure. Some bankers have said that if the SBI rate reaches 18 percent, certain banks will start to suffer negative interest rates.

The Central Bureau of Statistics (BPS) had earlier warned that inflation could reach double digits if the rupiah continues to weaken due to domestic political instability.

The increase in fuel prices by an average of 30 percent this month and electricity rates by 20 percent next month would also contribute to higher inflation, said economist Arie Kuncoro, who is also active in making the PEO forecast.

On the rupiah, Arie said that the local unit was expected to hover at an average rate of Rp 9,750 per U.S. dollar this year, slightly weaker than the government's forecast of Rp 9,600 per dollar.

He said that even with a change in the country's leadership, the rupiah would not get much stronger than it did when President Abdurrahman Wahid took over power in late 1999.

He said that this was mainly due to the huge demand for dollars to repay foreign debts particularly by the country's corporate sector.

"Even if there's a political settlement, we won't see a significant recovery in the exchange rate of the rupiah. The rupiah won't strengthen to the Rp 9,000 per dollar level or higher," Arie said.

The rupiah is currently hovering at around Rp 11,355 per dollar. The weakening of the rupiah is partly due to domestic political instability as embattled President Abdurrahman Wahid is facing the risk of being impeached by the People's Consultative Assembly (MPR), the country's highest legislative body, which plans to hold a special session on August 1.

Suhadi said that the PEO has forecasted that the economy will grow by 4 percent this year, lower than last year's 4.8 percent growth, will grow by 5.5 percent in 2002, assuming that a resolution to the country's political problems has been reached later this year.

"The downside is much greater," he said.

Suhadi said that if domestic political uncertainty continued, economic growth in 2001 would be much lower at 3 percent.

"The slower economic performance will create a vicious circle. On the one hand, political stability could be achieved if there's stronger economic performance, but on the other hand, to achieve stronger economic growth, political stability is vital," he said.(rei)