Economy on track toward recovery: Bank Indonesia

JAKARTA (JP): Domestic business activity continued to improve during the third quarter of this year, confirming that the country's crisis-hit economy is on track toward recovery, according to the latest survey on domestic business conditions conducted by Bank Indonesia (BI).

The survey also said that business would be even brisker in the fourth quarter of this year on greater expectations of higher demand, favorable weather and natural conditions and a momentum of further recovery in the financial sector.

Bank Indonesia deputy governor Achjar Iljas said during a presentation with business representatives on Wednesday, "Business expectations have improved. The worst is over."

Bank Indonesia surveyed 191 "principle enterprises" in the third quarter of this year. The survey, which was started in 1993, is aimed to having a better design of monetary policy.

Indonesia's business sector plunged to its worst condition in three decades after the economy contracted by more than 13 percent last year as the economic crisis that started in the middle of 1997 deepened.

Many companies had to close down, and some had to operate far below their production capacity.

The survey said that signs of improvement in business activity first emerged in the first quarter of this year.

It said that further improvement of business activity in the third quarter was particularly driven by higher consumer purchasing power, as reflected in higher market demand.

Bank Indonesia said that out of eight business sectors surveyed, five sectors -- the trade, hotel and restaurant sector and the service, industrial, transportation and mining sectors -- saw improvement in business volume.

It said that business volume shrank in the agriculture, financial and construction sectors.

But Bank Indonesia anticipated that business volume in the trade, hotel and restaurant sector and the service sector would decline in the fourth quarter because the year-end holiday coincides with the Muslim fasting month.

"But the other business sectors are expected to enjoy higher volume," it said.

Investment

The survey said that 35.1 percent of respondents, primarily in the agriculture and industrial sectors, made new investments during the third quarter, particularly on new machinery and equipment. And, it said, the same respondents planned to make new investments also in the fourth quarter, again focusing on new machinery and equipment.

"Respondents using overseas financing (for new investment) reached 19.4 percent," BI said.

"Over the next six to 12 months, only 29.32 percent of the respondents plan to make new investments, for expansion and replacing old machinery," BI said.

In terms of installed production capacity, 82.4 percent of respondents utilized more than 50 percent of their capacity during the third quarter.

"Some 55 percent of this runs at a capacity of between 70 percent and 100 percent," BI said.

The central bank expects that only a slight increase of respondents would operate at more than 50 percent production capacity in the fourth quarter.

The survey said that export volume in the third quarter declined due to lower international demand, particularly in the agriculture sector.

But it anticipated increasing export activity in the fourth quarter, particularly in the industrial and mining sectors, driven by expectations of higher international demand.

Achjar said that continuing improvement in business expectation coincided with positive development in the country's macroeconomic picture.

He pointed out that the 10-month inflation rate in October was 0.08 percent compared to 75 percent for the same period last year; Bank Indonesia's benchmark interest was now at about 13 percent compared to 70 percent last year; the exchange rate of the rupiah has stabilized at about Rp 7,000 per U.S. dollar compared to more than Rp 17,000 last year; and real GDP is estimated to record a positive annual growth of 0.2 percent in the third quarter of 1999.

The central bank forecast inflation in 1999 to be at about 2 percent, GDP at between minus 1 and zero percent, and BI's benchmark interest rate at between 10 percent and 12 percent by year's end.

Achjar said that with a more stable political condition following the democratic election of the country's new government in October, and improving relations with the international donor community, particularly the IMF, the macroeconomic picture would further improve throughout the rest of the year.

"The exchange rate can continue to strengthen to below the Rp 7,000 level average," he said.

"I expect the Aceh situation will not deteriorate," he added, referring to the increasing demand of the Acehnese to hold a referendum to decide on whether the province would remain a part of Indonesia or become an independent nation.

"Our exercise is that the economy will grow by between 3 percent and 4 percent in 2000," Achjar said, assuming that political stability holds. (rei)