The economy will remain resilient next year despite tough challenges ahead stemming from a predicted slowdown in the global economy as a result of high oil prices and the U.S. subprime mortgage crisis, a World Bank report says.
"We are projecting 6.3 percent growth this year and are expecting it to pick up a bit further to 6.4 percent next year," WB East Asia and Pacific lead economist Milan Brahmbhatt, in Washington, said via a video linkup Thursday with reporters in Jakarta.
Milan said that Indonesia would be able to weather short-term global volatility arising out of the U.S. subprime mortgage crisis and the renewed surge in oil prices through increased domestic consumption and investment, which would continue to sustain growth.
According to the report, investment growth had been running at around seven to eight percent per annum since the second quarter of 2006 up until the end of June, with indications of a further pickup in the near-term.
"Exports have also been doing well, not only commodity exports, but also non-traditional exports. I think those are all pretty positive signs and things look quite strong going forward," Milan said.
The report says that the strength of the country's exports is reflected in the current account surplus, which is projected to widen further to $10.8 billion this year, or about 2.5 percent of GDP.
As a result, net international reserves climbed steadily during this period to almost $53 billion at the end of September, compared with $42.6 billion at the end of last year.
Picking up on Milan's comments, WB lead economist for Indonesia William Wallace said that the country's inflation would remain manageable despite high oil prices, and would come in at 6.5 percent at the end of 2007, and further decline to 6 percent in 2008.
"We are not expecting to see a large overall pickup in inflation as the world seems to be able to adjust to higher oil prices," he said.
Based on the above economic growth scenario, Wallace said that Indonesia could reduce the number of people living in poverty, defined as living on under $2 a day, by 4.6 million from 105.3 million to 100.7 million out of a total population of 236.4 million next year.
As for oil prices, Wallace said that the report assumed they would average $70 a barrel this year, $72 next year and just under $70 in 2009.
However, the report says that given the tight market conditions, speculative demand and political risk factors, there is a risk that prices could remain above $90, which could lead to an income loss in East Asia of about 1.1 percent of GDP.
As for the impact of the subprime crisis, the report said that the financial markets were able to absorb it with minimal disruption of overall economic performance to date, with the Jakarta Stock Exchange (JSX), after plunging by 20 percent in the three weeks between late July and mid August, rebounding quickly and hitting record highs again by mid-October.
On the projected slowing down of the U.S. economy, Wallace said that the connection between U.S. growth and Indonesia's may not be that strong.
"The estimate is that if U.S. growth is down by one percent, then Indonesia's may be down by half a percent," he said.
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