Growth slackening
The Central Bureau of Statistics (BPS) reported last week Indonesia's economy grew by only 3.92 percent in terms of real gross domestic product in the third quarter, bringing cumulative growth during the first three quarters of this year to a mere 3.39 percent.
The growth figures simply confirmed what most analysts have predicted over the past few weeks. Bank Indonesia (central bank), for example, revealed early last month that consumer demand, the country's main engine of growth, was faltering while exports continued to fall and investment remained very weak.
With only modest prospects for broad economic growth, even local demand appears to look fragile as consumers are worried about the chance of losing jobs. Consumption expanded by 6.3 percent (year-on-year) in the second quarter as consumers reacted positively to the newly found economic and political stability.
This consumption growth also seemed to have been fueled by rapidly rising formal wages and strong growth in consumer credit. But consumer demand slackened to 4.9 percent in the third quarter. The Bali bomb blast could accelerate the slowdown in consumer demand as the tragedy may affect consumer confidence, although the decline would not be so steep in view of the seasonal surge in consumption during the Idul Fitri and Christmas holidays.
Growth in the fourth quarter would have to be more than 6 percent to meet the official growth target, but after the Bali bomb blast this prospect seems unlikely. No wonder, BPS further endorsed the central bank's prediction that the government's full-year growth target of 4 percent this year appeared unreachable.
The World Bank was also downbeat about economic prospects. In its latest assessment of Indonesia, after the bomb attack in Bali, the World Bank foresaw the economy would be able to expand by only 3.2 percent this year, lower than the 3.3 percent growth in 2001 and 4.9 percent in 2000.
This means that unemployment would increase and poverty reduction stall.
This development is worrisome indeed as it shows how the country has lost the momentum for high growth.
Strengthening macroeconomic and political stability and reinvigorated structural reforms from early this year had improved market confidence, which allowed for a stronger rupiah and lower interest rates. But as the latest data has confirmed, this stability did not translate into robust growth.
Some analysts may consider this prediction too pessimistic, pointing out the steady expansion in the demand for electricity and cement, which indicates a high level of economic activity.
True, the BPS statistics might not have captured all growth in the economy, especially the operations of small- and medium-scale enterprises. The high expansion in lending to small- and medium- scale businesses also served to rebut the too pessimistic outlook.
Despite the slight difference in the assessment of the economic outlook, the bottom line is clearly not encouraging at all. The growth prospect is dampening this year and next year, especially because imports continue to decline, which means that exports will likely remain weak.
The Bali attack will increase the incidence of poverty and will have a more widespread, national impact through a slowdown in GDP growth and the depreciation of the rupiah, and their negative repercussions on inflation, interest rates and the state budget burden, with a resultant impact on debt servicing.
The government is preparing a big stimulus for reinvigorating economic activities next year. While this pump priming is badly needed, it is not sufficient to achieve even the modest growth target of 4 percent for 2003. Private sector activities should be energized as well.
Most importantly, the government should accelerate reforms to offset the setback caused by the Bali bomb blast, strengthen policy coherence and conclude more credible deals related to asset recovery and privatization in order to regain market confidence in the economy.