Mon, 14 Apr 2003

Global slowdown, SARS still a threat to RI economy

Dadan Wijaksana, The Jakarta Post, Jakarta

As the war in Iraq comes to a conclusion, one uncertainty clouding the world economy has now been lifted. But the prospects for the Indonesian economy remain gloomy due the threats posed by the flu-like disease, SARS, economists say.

StanChart economist Fauzi Ichsan said that although the Iraq war was relatively short, it still had a negative impact on the world economy, which in turn would also affect the local economy.

"We predict that the world economy will now grow by around 3 percent with the war, as compared to around 4 percent without the war. This will obviously have an impact on the domestic economy," Fauzi said.

By comparison, the global economy posted growth of around 2.8 percent last year.

Even without the war, a rebound in the global economy would still take some time because of the continued slow pace of recovery in the U.S., Fauzi added.

The U.S. is one of the world's major economic dynamos, with around one third of the world's total exports being absorbed by the country. It is also one of Indonesia's main export destinations.

A slower recovery in the U.S. would only further slow down the already fragile world economy.

"Not to mention what will happen if the United Nations (UN) and European Union (EU) are not included in the Iraq reconstruction program. In such a case, the U.S. would have to shoulder the huge financial burden alone.

"This would put more pressure on the U.S. economy," he said.

Analysts have predicted that at least US$100 billion will be needed to rebuild Iraq.

Fauzi was commenting on the country's economic prospects now that the Iraq war is virtually over following the taking of control of Baghdad by U.S. ground forces last week.

The three-week war, which was much shorter than anticipated by many, lifted earlier fears of another round of world recession should it have turned out to be prolonged.

But, not only had the war already taken its toll on the world economy, the recent emergence of Severe Acute Respiratory Syndrome (SARS) would also have the potential to further slow down global growth.

SARS, which has claimed many lives throughout the world, was damaging the tourism sector worldwide, especially in countries heavily dependent on the service-based economy.

"But, equally importantly, it further damages investor confidence in the global economy, including Indonesia's economy, which is in dire need of investment," Fauzi said.

Another thing that had the potential to damage the economy here was international oil prices.

After soaring in the run-up to the war, oil prices have steadily come down, with analysts fearing they could sink below $22 per barrel, the benchmark level set in the 2003 state budget.

If that happens, the government would somehow have to make up the loss in potential revenues generated from oil exports.