Economy to keep slowing until mid 2006, analysts say

Economy to keep slowing until mid 2006, analysts say

Urip Hudiono, The Jakarta Post, Jakarta

The nation's economy is likely to continue slowing until the
first half of next year as a consequence of the ongoing impact of
high inflation and interest rates, analysts say, but will pick up
should the government successfully deliver policies to increase
exports and development expenditures.

Economist Faisal Basri of the University of Indonesia said on
Tuesday at a Bank Danamon-sponsored economic seminar that the
most crucial issue for the government was to manage interest
rates to balance inflation and economic growth.

"The recent rise in inflation and interest rates have indeed
made the economy fail to gain on last year's momentum of growth,"
he said. "Fortunately, it was not caused by a weakening in our
macroeconomic fundamentals, but more to recent poor management."

As Indonesia's core inflation was estimated to be only between
9 and 10 percent, Faisal said a 12 percent interest rate would
actually be sufficient to contain inflation, as well as support
the rupiah.

The central bank continued raising its benchmark BI Rate to
12.75 percent on Dec. 6, as on-year inflation surged to 18.38
percent in November after the Oct. 1 fuel price hike. The rate
hike had been lower than expected, signifying Bank Indonesia's
better coordination with the government in an effort to avoid
further hurting economic growth.

The country's gross domestic product (GDP) growth has recently
been on a downward trend due to high inflation and interest
rates, from an on-year 6.6 percent during last year's final
quarter to only 5.3 percent in this year's third quarter.

Besides pursuing proper fiscal and monetary policies to
stabilize the macroeconomy as a basis for sustainable growth,
Faisal also urged the government to spur further growth through
breakthrough policies in the real sector, emphasizing
particularly on how to encourage labor-intensive, export-oriented
manufacturing sectors, by reining in the high-cost economy and an
obstructive bureaucracy.

"The government must scrap taxes, duties and illegal fees that
only hamper export activities," he said. "It should also
reconsider pursuing a stronger rupiah, which may benefit us (in
terms of) cheaper imports, but will hurt exports of our
agricultural, fisheries, mining and manufactured goods."

Faisal further warned the government to pay attention as well
to possible financial imbalances between emerging Asia and the
U.S., which could lead to trade disputes affecting Indonesia's
export activities.

With all these factors, Faisal expects the economy to grow by
5.6 percent this year and to rise to 5.9 percent next year as
inflation mellows down to 8.8 percent and the business climate
improves. The government is targeting a growth rate of 6 percent
this year and 6.2 percent next year from last year's 5.13
percent.

Speaking at the same occasion, International Monetary Fund
(IMF) senior resident representative, Stephen B. Schwartz, said
that Indonesia's GDP growth will likely experience a "softening"
-- perhaps expanding by only 5.3 percent in 2005 and 2006 -- as
consumption and investments slow down on higher inflation, which
is expected to decline to 8 percent by the end of next year.

However, he was upbeat that Indonesia's economy may expand by
between 6 and 7 percent within the next three to five years.

"In the short run, the government needs to increase spending
in a timely manner, prioritizing such sectors as health,
education and those which stimulate work opportunities," he said.

"It should also continue financial reforms to strengthen the
banking sector, and improve the country's investment climate."