Economists upbeat on economic recovery

By Reiner S.

JAKARTA (JP) Despite the critical problems the country is facing, economists said the economy would continue its recovery process next year.

The Econit Advisory group expressed confidence that the economy would grow by around 6 percent to 7 percent in 2001, which is higher than the government's forecast of 5 percent as stated in the 2001 state budget.

"The economic growth will be pushed by almost all sectors in the economy," said Econit managing director Arif Arryman when launching the latest economic outlook report.

"The supporting environment for economic recovery in 2001 perhaps is the best that we can expect," he added, pointing out that the strong 4.2 percent world economic growth in 2001 and the further expansion in the coming years would bode well for the domestic economy.

Econit said private consumption, exports, and investments would continue growing, providing a strong foundation for the country's future economic growth.

"Consumers will continue to shop, and they will continue to increase their spending to provide a very strong foundation for Indonesia's sustainable economic growth," said Econit, which was cofounded by the Coordinating Minister for the Economy Rizal Ramli.

"From the supply side, the output gap is still relatively high, providing a greater room for further economic expansion, at least until 2001," it added.

Econit projected that growth in private consumption would remain high at 3.5 percent in 2001, net export to grow at 11 percent, while investment would grow by 14 percent, lead by residential investment in the property sector.

"Foreign direct and portfolio investments are expected to start to grow in line with the shift in global investment into the emerging markets, although the growth would not yet be significant," it added.

Meanwhile, Danareksa Research Institute forecast the economy to grow by around 4.3 percent in 2001.

"A 4.3 percent growth is actually quite okay considering that this comes from a high base," said Danareksa's Raden, pointing out that this year the economy was expected to grow by 4 percent compared to a low base of 0.3 percent growth in 1999. The government estimated growth this year at 4.5 percent.

Raden said the major source of growth next year would still come from the export sector, which is forecasted to grow by 15 percent compared to the estimated 20 percent growth this year.

He said the export sector would also become a source of investment because exporters had to reinvest part of their export earnings in order to maintain demands from overseas.

Minister of Trade and Industry Luhut Pandjaitan said the country's export revenue this year would reach around US$48 billion, which is already beyond the target.

But he admitted that around 60 percent of the export revenue has been parked overseas. He said the government would continue persuading exporters to repatriate their earnings. He did not provide details.

Raden said the construction sector would also start to grow next year by around 5 percent, including the construction of buildings and plants by manufacturers who export most of their products.

"Construction will be the second source of growth next year," Raden said.

He said that investment would be the third source of growth.

Raden noted that investments would come from the exporters, companies which had been restructured, and from foreign investors.

Foreign investment will come mainly through the purchase of various bank assets under IBRA, according to him.

"The trigger for the entry of foreign investment will be from the sale of Bank Central Asia (BCA) and Bank Niaga," Raden said.

The government plans to sell the majority of its ownership in BCA and Bank Niaga some time in the first quarter of 2001. The plan to sell the two banks was supposed to be realized late this year, but it was cancelled due to weak market sentiment. The IMF and the World Bank have been displeased by the delay.

But Raden said the consumption growth would not be significant next year because it had already grown quite high in 1999. He said consumption in 2001 would likely to only grow by 2-3 percent, which is equal to the estimated growth for this year.

On the government's fiscal deficit of up to 3.7 percent of the gross domestic product in 2001, Econit said this should not be a concern because exports, investments and private consumption would push the country's economic growth in the year.

"It is a pity the government tends to be pessimistic about the economic growth because of the state budget constraint.

The economic growth of 6-7 percent is very much possible to happen," it said, pointing out that the government only forecasted the 2001 economic growth in the state budget at 5 percent.

"Although the government is facing a severe budget constraint, the fiscal policy will still be feasible, because of foreign loans and the expected higher tax revenue," it added.

Econit said what remained a concern was the performance of the rupiah and stocks.

"The fate of the rupiah until now is still uncertain," the consultancy firm said.

The rupiah has been hovering at around Rp 9,500 per dollar early this month, which is more than a 25 percent drop from its level early this year. The government has assumed an exchange rate of Rp 7,800 per dollar in the 2001 state budget.

"The Jakarta Stock Exchange composite index is also not a picture that can represent the Indonesian economy which is experiencing strong growth," it added.

The firm explained that the performance of the rupiah and stock market had been disappointing due to the perception of domestic political instability. But it said the two economic indicators did not represent the real domestic economic condition.

On the outlook for the monetary condition in 2001, Econit said if the condition of the world economy next year could allow Indonesia to have a higher export growth, the domestic monetary condition was expected to be quite conducive for the country's economic recovery.

It said the rupiah in the longer run would strengthen to around Rp 8,000-Rp 8,500 per dollar, inflation in 2001 was projected to reach 6-8 percent, and bank lending credit at between 18 percent and 23 percent.

"The Bank Indonesia policy in 2001 will tend to be contractive, particularly if the rupiah is under pressure. But the central bank is expected not to change its policy radically in 2001," it said.

Inflationary pressure this year has been high due to a combination of various factors, including the recent increase in fuel and electricity prices, salaries increases, the weakening of the rupiah and the increasing consumer demand in anticipation of the year-end festivities. Inflation this year may reach 9-10 percent compared to the government revised target of 8 percent.

Danareksa's Raden said the plans by the government to raise fuel prices again in April 2001 had created an announcement effect to inflation this year. He said this would allow the next fuel price increase to only have a minimum impact on inflation in 2001, which he forecast could reach 7-7.5 percent.

Raden said the interest rate of the Bank Indonesia SBI promissory notes was projected to reach 10-12 percent next year, which is almost in line with the government assumption of 11.5 percent. The SBI rate is currently hovering at 14.32 percent. But Raden said the lower inflation level in 2001 would help reduce the interest rate.