Growth may weaken
Indonesia's overall economic performance in the first quarter, as reported by the Central Statistics Agency this week, was slightly better than what most analysts expected, growing 4.46 percent in real terms from the same period last year. However, compared to the previous quarter Gross Domestic Product (GDP) expanded by only 3.54 percent.
The agency recorded growth in almost all sectors of the economy, with agriculture cited as the best performer with a growth of more than 17 percent over the previous quarter, reflecting the peak harvest season.
The macroeconomic conditions were on par with what the market had expected. Investment remained moribund, as has widely been foreseen throughout this election year, and exports were stagnant, a condition that will likely continue amid the increasingly fierce competition in the international market, especially from China.
Even though the recent numbers show that the country is likely on track to achieve the 4.8 percent overall growth for the year that has been budgeted for, this rate of growth is certainly not enough to make a dent in the unemployment figures, which have reached an explosive level, with unemployed and under-employed people lastly estimated at more than 40 million.
Private consumption, the main driver of growth since 2001, is expected to continue increasing within the next six months as political parties who field candidates for the presidential elections in July and September will be spending heavily on their campaigns to attract voters.
However, the rate of increase in household spending may decline due to the steady fall in private savings over the past five years. Moreover, with interest rates widely expected to rise, as a result of the tightening of the monetary policy in the U.S. and stronger inflationary pressures from the steep hike in international oil prices, private consumption will lose some of its strength.
The growth prospects for the second quarter may be even less promising due to the negative ramifications from the sharp depreciation of the rupiah against the dollar most of this month and the exorbitant oil prices.
If the rupiah rate remains in the Rp 9,000 to Rp 9,300 per dollar range as it has been recently, compared to the budgeted band of Rp 8,500-8,700 previously, and if banks, jittery over the turbulence in the financial market, move to tighten their credit policy, businesses will be in for a much more difficult ride and the economy could be on shaky ground.
Theoretically, the weaker rupiah will strengthen the price competitiveness of domestic products on the international market. However, the combined impact of higher interest rates and costlier imports and more expensive oil will wipe out any competitive advantage brought about by the weaker exchange rate.
The country's manufacturing industry still relies mainly on imported raw materials and intermediate goods. Moreover, though the government still provides price subsidies for most domestic fuels, the prices of aviation fuel, kerosene and diesel oil for fishing and mining companies and bunker oil are floated on the market prices in Singapore.
The sharp depreciation of the rupiah and the high rise in international oil prices have also raised doubts about the government's ability to maintain its budget estimates for the current fiscal year.
Several members of the House Budgetary Committee, for example, have revised their estimates upward for budgetary allocations for domestic fuel subsidies from Rp 14.5 trillion (US$1.6 billion) to Rp 30 trillion.
The state oil and gas company Pertamina even estimates now that fuel subsidies could reach Rp 40 trillion this year due to the vicious cycle put in motion by the weaker rupiah and higher international oil prices. The 2004 budget assumes an average oil price of $22/barrel and average rupiah exchange rate of Rp 8,600 to the dollar. Moreover, even though Indonesia exports about 1.1 million barrels of crude oil a day, it has become a net importer since January.
Such a big amount of additional spending certainly will further stoke inflationary pressures that could affect the macroeconomic stability within the next four months of the campaigning hurly burly for the presidential elections.
So all in all, even barring any major security disturbances during the upcoming six months of the presidential elections (assuming it goes to a runoff as expected) and transition to the new government, the economy would at best muddle through with a growth of just 4.5-4.8 percent again during the period of heightened political emotions and a highly volatile international financial market.
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