Indicators call for caution

Indicators call for caution

The key indicators of the Indonesian economy so far this year,
although not a cause for alarm, call for extra caution. The balance of
payments seems to have undergone stronger pressures caused by a decrease
in oil export revenues and smaller gains in non-oil exports. Although
non-oil exports in the first semester of this year increased, their
growth rate declined to 6.5 percent from 26 percent in the same period
last year, while oil exports fell by 8.6 percent. But since non-oil
imports expanded by 12.6 percent, compared to an increase of only 3.6
percent in the same period last year, the current account deficit rose
sharply to US$2 billion from $932 million.

Inflation, as announced after the limited monthly cabinet meeting on
Saturday, was 0.53 percent last month. Though that was down from 0.89
percent in August, the inflation was still relatively high as the
cumulative rise in the consumer price index for the first nine months
has already reached 7.38 percent. That means that even though the
monthly inflation rate for the next three months could be checked at
0.50 percent, the inflation for the whole calendar year would still be
on the high side of a single-digit level.

The fact that the foreign reserves held by the central bank remained
large at $12.5 billion, or equivalent to more than four months of
imports, might be taken as a sufficiently strong buffer against further
pressures on the balance of payments. We may also console ourselves with
the upward trend in the oil prices since April. The oil prices have
increased from an average of $14.7/barrel in the first quarter to
$16.36, slightly higher than the average of $16 used for oil revenue
estimates for the current fiscal year (1994/1995), between April and
August.

These positive indicators, we think, should not make us complacent.
Extra caution is required instead, to guard against further pressures on
our external balance. The margin of safety is already very thin. We are
especially worried about the 12.6 percent increase in imports during the
first semester. The import expansion could, to a certain extent, be seen
as normal for an expanding economy because new investment projects need
capital goods and a growing manufacturing industry requires imported
inputs.

But since the high import increase took place at a time when the
growth rate of exports fell sharply, that should be a strong reason to
be extra cautious, especially in view of the relatively high inflation
rate. This development, in our opinion, makes it even more imperative
than ever for the private sector to refrain from implementing capital-
intensive projects which require large imports but which have a long
gestation period.

The Governor of Bank Indonesia (central bank) Soedradjad Djiwandono
did not exaggerate the magnitude of the problems when he recently
stressed the need for restraints on large projects to prevent the
economy from overheating. For Indonesia, which pursues an open capital
account (free foreign exchange regime), high inflation and strong
pressures on the balance of payments could cause far-reaching
implications, notably on the stability of the rupiah exchange rate.
Extra safeguards against such undesirable developments are especially
needed during the last quarter of the calendar year when the government
is finalizing its budget proposal for 1995/1996 which will be submitted
to the House of Representatives in the first week of January. During
this period, wild rumors could easily spread among the people who like
to speculate about the next state budget and any supplementary fiscal
and monetary measures that might be taken.