Economy of Year of the Rooster heading for bleak finale

For Dec. 27

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.