Growth may weaken

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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