Indef, LIPI see moderate growth for next year
Fitri Wulandari, The Jakarta Post, Jakarta
The country's economic growth is projected to remain at a moderate level of around 4 percent next year as uncertainty during the seven-month voting and campaigning periods will cause investment to remain weak.
The Institute for Development of Economics and Finance (Indef) predicted the economy to grow by between 4.2 and 4.4 percent in 2004, which is lower than the government's projection of 4.8 percent.
Meanwhile, the state-sponsored Indonesian Science Institute (LIPI) said that if the general election process was not smooth, the economy would only grow by 4 percent, which is the same level estimated for this year.
Indef economist Drajad Wibowo said in a press conference on Tuesday that domestic consumption would continue to be the main engine of next year's economic growth, as investment and exports would remain weak.
Indef predicts political parties could spend around Rp 15 trillion next year on campaigning and other activities. This large amount of money will eventually mean a boost in domestic consumption.
He said that investment may only start to enter the country in the second half of next year, assuming that the election process goes well.
"Indonesia (economy) would grow by 3.9 percent if there is no investment coming in next year," Drajad said.
He added that export would also remain weak as local businesses would tend to focus on trading goods in the domestic market instead producing goods for the export market as competition from China and Vietnam becomes tougher. This is despite the expected recovery in the global economy, which should increase demands for export products.
For the past couple of years, the country's economy has been mainly driven by domestic consumption due to the weak performance of the investment and export sectors. Investors have been generally reluctant to pour in fresh money into the country due to a host of problems at home such as corruption, poor infrastructure, lingering labor conflicts and lack of faith in the judiciary.
During the first nine months of this year, capital formation (a measure of investment) was 25 percent lower than the level prior to the 1997 economic crisis.
But LIPI's economist Wijaya Adi said that there was also a possibility for the economy to grow by 5.4 percent next year particularly if the elections go very well.
He said that under such a scenario, the current trend of increasing stability in macro-economic indicators would push households and businesses to become more optimistic about the economy, thus triggering higher investment.
On the external front, the expected recovery in the economies of developed nations (export destinations for many local products) will also bode well for exports.
In the worst case scenario, if the election disappoints the people and there is social unrest, the economy will slow way down, while inflation will increase and the rupiah will weaken.
During the past year, the country's macroeconomic indicators have improved as evidenced by the low inflation, stronger rupiah against the U.S. dollar and declining interest rates.
Both Indef and LIPI warned of the possible worsening unemployment problem next year, particularly if the economy grows too slow.
LIPI predicted that full unemployment this year would be 10.3 million people, a 14 percent increase from last year's 9.1 million. Next year the number could grow to 10.75 million jobless.
Economic indicators for 2004
Indef LIPI
GDP(%) 4.2 - 4.4 4.8 - 5.4
Inflation rate(%) 5.5 - 7.0 6.4
Interest rate(%) 8.4 - 9.0 8 - 8.84 (3-month BI)
Exchange rate(Rp) 8,400 - 8,700 8,000 - 8,300
Open unemployment (millions) 10.5-10.8 ---
Population Below Poverty Line (%) 17.7-18.0