Economy in Year of the Rooster heading for bleak finale

Economy in Year of the Rooster heading for bleak finale

Primastuti Handayani, The Jakarta Post, Jakarta

For "Donny", a 32-year-old employee of a private company in
Central Jakarta, the Year of the Rooster has brought no good.

"This year sucks," he said. "Although my office raised our
salaries recently, it was not a significant raise
considering the inflation rate."

With a monthly salary of about Rp 6 million (US$615), Donny
has to set aside a third of it to pay his housing loan
installments.

"The rising interest rate has pushed my payments up to Rp 2.3
million from Rp 2 million previously. While other expenses also
surged, particularly food prices," he said. He bought a house in
a housing estate in Karawaci, about 25 kilometers west of
Jakarta, but still lives in a rented low-cost apartment in
Pejompongan, Central Jakarta.

"Living in the capital's downtown area helps me save more," he
said. "Imagine if I already lived in my own house, how much would
I spend on transportation then."

Donny's story is typical of many other's with bank loans.
Yet, millions of other Indonesians have to endure a much tougher
time.

Indeed, if a worker like Donny -- who actually earns more than
six times Indonesia's income per capita of about US$1,000, which
means less than Rp 1 million a month -- is feeling the pinch of
higher living costs, imagine the hardships suffered by millions
of his fellow Indonesians, most of whom do not even have access
to bank loans.

Interest rates for customer loans have gone up, following the
central bank's policy to raise its BI key rate to 12.75 percent
on Dec. 6, the sixth since Bank Indonesia introduced its
inflation-targeting BI Rate at an initial level of 8.5 percent in
June.

The higher BI key rate has increased lending interest rates at
banks and some people have decided to resell their houses or
vehicles, or for businesspeople, to reduce their production
capacity, which could mean a lower revenue margin and, in many
cases, layoffs.

The skyrocketing year-on-year inflation rate -- which the
Central Statistics Agency (BPS) reported as standing at 18.38
percent in November -- was the main reason for the BI to raise
the key rate.

With consumption comprising more than 60 percent of the gross
domestic product (GDP), the rate increases and high inflation --
which cuts people's purchasing power -- have eventually
contributed to a slowdown in economic growth, from 6.2 percent in
this year's first quarter to 5.3 percent in the third.

The current high inflation and interest rates have a lot to do
with the government's move to nearly double the prices of premium
gasoline and diesel fuel on Oct. 1, and nearly triple the price
of kerosene, which is mostly used as a cooking fuel by the
nation's poorest people. The price hike was the second this year
after fuel prices were increased on March 1 by an average of 29
percent.

The government, backed by the House of Representatives, argued
that the surging global oil prices, which broke the US$70 per
barrel par on Aug. 30, had put the country's fiscal stability at
serious threat with fuel subsidy expenditure ballooning well over
Rp 110 trillion (US$11.22 billion).

Higher fuel prices have caused surging prices in goods, mostly
transported by cars, including food staples.

The BPS reported on Dec. 1 -- based on its month-long survey
of 35 commodity prices in 45 cities nationwide -- that food
prices rose 2.47 percent in November, while the prices of
processed foods, beverages, cigarettes and tobacco have gone up
2.06 percent. It also said that public spending for housing,
water, electricity and fuel rose by 0.64 percent, while
transportation, communications and financial services costs eased
0.53 percent.

The slowdown has resulted in a rise in unemployment, which the
BPS reported as rising by 1.3 million from August to October, in
contrast to the declining trend from 1.1 million in 2001 to
431,000 in 2004. To help ease the burden of an estimated 15.6
million low-income households -- or those with an individual
monthly income of less than Rp 175,000 -- the government has
provided direct cash assistance of Rp 300,000 each quarter over
the next year.

More workers are facing dismissal next year due to the
combined impacts of increasing operational costs as a result of
the higher fuel prices and the implementation of new provincial
minimum wages. The Indonesian Employers Association (Apindo) has
estimated that some 600,000 workers in the ailing manufacturing
industry in Greater Jakarta are likely to lose their jobs next
year.

Higher inflation and fuel prices increased pressure on
President Susilo Bambang Yudhoyono to reshuffle his Cabinet's
economics team, particularly Coordinating Minister for the
Economy Aburizal Bakrie.

Susilo finally announced on Dec. 5 that Boediono, finance
minister under Megawati Soekarnoputri's leadership, would replace
Aburizal. The President also replaced finance minister Jusuf
Anwar with Sri Mulyani Indrawati and switched the positions of
industry minister Andung A. Nitimihardja and Fahmi Idris.

The new economics team line-up has boosted confidence in the
market, as shown in the strengthening rupiah against the
greenback, standing at 9,754 on Dec. 12 and the Jakarta Composite
index showed signs of picking up at 1175.00 on the same day.

Boediono said immediately that he and his economics team would
focus on keeping inflation in check and strengthening the rupiah
against the U.S. dollar.

His statements have providing breathing space as previously
the central bank had estimated that inflation would remain in
double digits until next year's third quarter. The government is
expecting a full-year inflation of 8.6 percent for 2006.

Despite all the gloomy reports on the country's macroeconomy,
the Investment Coordinating Board (BKPM) reported that actual
foreign direct investment (FDI) during January to October had
more than doubled to $8.55 billion in 785 projects, from $3.23
billion in 421 projects for the same period of last year.

However, foreign investors still concerned over the volatile
rupiah exchange rate against the U.S. dollar and occurring
problems in investing in Indonesia, such as peculiar regulations,
lack of contract sanctity involving the government, state
enterprises and the private sector, as well as unfavorable tax
and labor laws.

As only less than half of Indonesia's 220 million population
-- 47 percent educated people (those graduating from high
schools) and 46 percent uneducated ones as shown in a Single
Source survey by Roy Morgan research firm covering 25,000
respondents aged above 14 years old in 16 provinces in September
-- believed that the country's economy appears to be improving,
Susilo had a lot of work on his hands.

Donny is one of those who believe the economy will improve
next year.

"I have high hopes that the country's economy will be better
next year," he said, referring to the Year of the Dog. Donny is
betting for a better year next year, sharing the views of many
economists who predicted that inflation, and thus interest rates,
would ease next year.

"Coupled with a more robust investment performance, the
economy will pick up much faster next year," he said.