Experts give mixed forecast for 2002 consumption outlook

Berni K. Moestafa, The Jakarta Post, Jakarta

Hit by a plunge in export sales, Indonesia is relying on its only other economic growth engine, consumer spending, but analysts have produced a variety of forecasts on whether consumption will remain strong enough next year to sustain current economic growth levels.

The government said Indonesia's economy would maintain its current growth rate, providing local consumption remained bullish.

It estimated that the economy, as measured by its gross domestic product (GDP), could maintain a growth rate of up to four percent.

That, however, has met with skepticism from analysts, who warned this year's high consumption growth would start to tail off next year.

"Purchasing power for 2002 is likely to be lower than this year's," said David Chang, director at PT Vickers Ballas Tamara on Wednesday.

He said inflation would continue to remain high, stoking up prices, and eventually put pressure on consumer purchasing power.

Annual inflation growth has been at double-digit rates, and is expected to hit 12 percent by December.

Consumer spending has thus far remained strong, despite inflation pushing up prices.

This was, in part, possible because consumers began spending cash that had been saved as bank time deposits during the 1997 financial crisis.

Back then, time deposits attracted interest rates of more than 45 percent, as banks with liquidity problems scrambled to attract funds.

With interest rates steadily falling since 1998, time deposits traded for goods made up the bulk of last year's consumption.

Now there is concern that these funds are beginning to deplete fast, with no other revenue source in sight to replenish them.

But Chang said even with consumer spending stifled, a growth rate of 3.5 percent in the economy next year was still feasible.

"We cannot rely totally on the local economy ... there is hope of foreign investment inflow providing an improvement to the political climate," Chang said.

With its deficit state budget, the government has made clear its spending cannot stimulate the economy in either this or next year.

That role has been assumed by the private sector. Strong export sales and buoyant consumer spending have been the main growth engines behind the country's economy, which grew by 4.8 percent last year, and an estimated 3.5 percent this year. The government forecast growth this year at 4 percent.

But export sales already showed signs of fatigue from early this year, as pressure mounted due to a slowing U.S. economy.

The government has estimated that exports this year will drop to US$42 billion to $45 billion, as against last year's $47 billion.

As for consumption, senior analyst at Kim Eng Securities Hans Anggito predicted it to weaken next year.

"If we consider the high inflation, I doubt that consumer spending will be as strong as this year's," he said.

Hans added the weaker rupiah made imported consumer goods expensive, and demand for them would likely fall as well.

He and Chang agreed that foreign direct investment might offset the weaker level of consumption.

Despite the global economic slump, Indonesia's privatization program might still attract foreign investors, said Hans.

Coordinating Minister for the Economy Dorodjatun Kuntjoro- Jakti has said Indonesia would weather the global downturn on the back of a resilient domestic economy.

He noted a surge in energy consumption, an influx of smuggled goods, and robust retail sales as sure signs of a brisk economy.

Consumer preference for spending cash rather than saving it at banks contributed much to this year's strong consumption, said Citibank economist Anton Gunawan.

He said a 20 percent income tax rate slapped on bank time deposits had made investing in them unattractive.

The government imposed the tax ruling early this year, and applied it on interest income from time deposits in excess of Rp 7.5 million (about $714).

"People are also not earning much at current bank interest rates, with inflation this high; their real interest earnings will remain small," Anton said.

He added that consumers in the middle- to higher-income groups would maintain their lead on consumption growth next year.