Indonesian economy in for robust growth
Indonesian economy in for robust growth
Indonesia's economy is ending 1994 with a respectable growth
rate and is in for another robust expansion, according to the
views of noted economists, which are rounded up below by Vincent
Lingga. In the second article, the Research Department of PT
Sigma Batara, a major securities company, analyzes the
performance of the Jakarta stock market and charts out its likely
development in 1995.
JAKARTA (JP): Domestic and foreign economists are unanimous in
their verdict on Indonesia's economy, expecting economic growth
of at least 6.7 percent this year and another robust expansion of
more than seven percent next year.
At the same time, they signal extra caution about inflationary
pressures and a larger possible deficit in the current account of
the balance of payments.
Douglas H. Short III, the Senior Director and Country Head of
American Express Bank here, sees 1994 and 1995 as very good years
of respectable economic growth rates at around seven percent.
"But you will not see a large increase in growth next year,
compared to this year. Inflationary pressures may require the
government to slow down the growth a little bit to cool off the
overheating. That, I think, will be a good policy to do," Short
says.
Merrill Lynch & Co., a major securities company of the United
States that set up a joint venture here a few weeks ago, is even
more bullish and has predicted seven percent growth this year and
7.5 - 8.0 percent next year.
Noted Indonesian economists Sumitro Djojohadikusumo, Sjahrir,
Mari Pangestu and Hadi Soesastro are equally optimistic and
foresee growth of 6.5-6.7 percent this year and 7-7.2 percent in
1995.
The analysts attribute their bullish projection partly to the
strong economic recovery expected in the world's economic
powerhouses of Japan, the United States and Germany.
The Organization for Economic Cooperation and Development
(OECD) predicted last week that the economies of its 25 member
countries (all developed) would likely grow by an average of
three percent in 1995, up slightly from an estimated 2.8 percent
this year.
More encouraging is the OECD's prediction of a non-
inflationary period of growth over the next two years.
Indonesian economists take special note of the agricultural
sector, which they expect to recover strongly next year with a
growth of at least 2.5 percent.
"If our economy could still grow by 6.5 percent last year when
the agricultural sector expanded by a mere 1.5 percent, I don't
see why our gross domestic product growth could not exceed seven
percent next year," Sjahrir says.
Agriculture contributes around 18 percent to Indonesia's GDP.
"I also expect significant improvements in the banking
industry and in basic infrastructures such as electricity and
telecommunications," adds Sjahrir, the Managing Director of the
Institute for Economic and Financial Research.
The analysts take the explosion early this year of US$450
million loan scandal at the state-owned Bank Bapindo a momentum
for an accelerated consolidation process of the banking industry.
The business sector will reap more benefits from the
consolidation of the banking industry that has taken place over
the past two years, according to Sjahrir.
The economists don't expect any drastic fiscal measures. In
addition, the average price of crude oil exports, that will
generate about 25 percent of the government's revenues, will most
likely reach the government estimate of $16 per barrel for the
current fiscal year ending next March.
International oil prices are projected to fluctuate within the
range of $16-$18 next year, which is seen as relatively
comfortable.
Hadi and Mari, both senior economists of the Centre for
Strategic and International Studies (CSIS), cite seven sectors,
notably agriculture, manufacture, mining, electricity, gas and
water, transportation and communications, trade and restaurants
as the main propellers of growth next year.
Merrill's economist Sanjoy Chowdhury expects strong growth in
fixed investment and buoyant consumption spending next year.
"Private consumption growth is likely to accelerate from 5.8
percent in 1993 to 7.5 percent this year and 8.5-9.0 percent next
year," Chowdhury says.
He cites the increase in labor wages and the compulsory extra
month's wages, and the 5-15 percentage point cut in income tax
rates as of January (based on new tax laws), as the main factors
that will spur consumption growth.
"The more immediate effect of the changes (lower tax rates)
should be a boost in disposable incomes," Chowdhury says.
"But my concern is whether the collection effort will be
stepped up to offset the decline in tax receipts caused by the
lower tax rates," Short says.
Short calculates that the tax base will be broadened
significantly to take most benefits from the lower tax rates.
The new tax laws, which go into effect next month, will reduce
the lowest income tax rate from 15 to 10 percent and the highest
one from 35 to 30 percent and will increase the number of tax
brackets from three now to four.
Chowdhury notes, however, that while 1995 may mark a peak in
the current growth cycle, longer-term prospects will depend on
further deregulation measures and additional efforts to reduce
the high-cost structure of the economy.
Chowdhury suggests that the government lower import tariffs
further and reduce non-tariff barriers that protect uncompetitive
domestic industries.
The economists also share the same view about potential
problems that may upset their rosy projections, more specifically
-- inflationary pressures and the current account deficit.
They welcome the almost 200 percent increase in licensed
foreign investment commitments of around US$23.7 billion and the
35 percent rise in domestic investment approvals to Rp 53
trillion ($24.3 billion) in the first eleven months of this year.
But at the same time, they are concerned about their expansionary
impact on imports.
"About 50 percent of capital outlays for large projects is
usually spent on imports and this may worsen the current account
deficit," Hadi says.
He foresees stronger pressures on the balance of payments,
especially because exports may grow only by 11-13 percent, lower
than the 16.8 percent target, while imports will expand at least
by 15 percent.
Finance Minister Mar'ie Muhammad also acknowledged at a
hearing with the House Budgetary Commission early this month that
extra caution was needed to keep the current account deficit in
check.
Hadi says if import growth is not controlled, the current
account deficit may rise to $4-$5 billion, which is 4-5 percent
of GDP and twice as high as the government target.
"Therefore, I will not be surprised if the government takes
measures to restrain import growth next year," he adds.
Chowdhury also projects a larger current-account gap to result
from the combination of higher imports and a larger deficit in
invisible (service) trade.
"Indonesia's invisible trade deficit, which stood at $11
billion in 1993, may grow to about $12.5 billion by 1995 due to
larger interest payments on external debts," he says.
Minister Mar'ie admitted that the service account deficit
increased by 5.3 percent during the April-October, 1994 (first
half of fiscal 1994-1995) period.
He blamed the increase on the higher spending on import
freight and foreign debt servicing.
Chowdury sees that trend as discouraging, especially since
Indonesia's foreign debts are approaching the $100 billion mark.
Official figures showed that as of September, Indonesia's
foreign debts totaled $93 billion, of which $56.6 billion were
owed by the government and $36.3 billion by the private sector.
The Merrill Lynch economist therefore sees a larger capital
inflow as crucial for financing the deficit. This would also
allow the central bank to maintain the rupiah rate on a stable
path with an annual depreciation of 3-4 percent, as it has over
the past two years.
Douglas Short, however, is not too worried about the rupiah
rate, which he expects to remain stable within the central bank-
set depreciation band of 4-5 percent.
"I am glad that Bank Indonesia is closely monitoring the
situation and always sees to it that monetary growth is sound and
sustainable," the Amex Bank executive says.
Short also has observed a healthy trend in the business
sector, evidenced by the many companies that have restructured
their capital either through the domestic and foreign debt
markets or through stock exchanges.
The sources of funds for the corporate sector are much more
varied now, especially because more foreign banks have come to
Indonesia, he says.
"The Japanese banks have become more active. You also see a
lot more European banks and major international securities
companies coming here. I think this trend will continue next
year," Short points out.
All this, according to him, reflects the international
community's confidence in Indonesia's economic prospects.
He does not see the heavy indebtedness as something to be
inordinately worried about.
"Indonesia has a very good track record. The international
community is very impressed by the way Indonesia has handled its
foreign debts," Short notes.
Analysts also expect higher lending rates next year to be part
of the central bank's measures to sustain sound monetary growth.
"But I don't think the upward trend in the interest rates will
last for the whole of next year. They will decline again if the
inflationary pressures decrease," Short says.
But many analysts expect the prime lending rates, which have
risen to a range of 17-18 percent, to hover at about 20 percent
next year.
" I am greatly concerned about the steep increase in lending
to the property sector. This means that many banks have converted
quite a sum of their short-term deposits into long-term credits,"
bank analyst Laksamana Sukardi observes.
Such gapping practices, according to Laksamana, increase the
liquidity risks of banks and make them highly vulnerable to
monetary fluctuations.
"Hence, I expect many banks to raise deposit rates and,
consequently, lending rates to cope with the liquidity risks,"
says Laksamana, chief executive officer of ReFORM Consulting and
a director of ECONIT Advisory Group.
Amex's Director Short expects very tough competition in the
banking industry as the number of banks has now almost reached
240.
"I think the consumers could better be served by a smaller
number of banks," he says.
Laksamana concurs that the development of the banking industry
should emphasize quality rather than quantity, suggesting that it
is better to have a smaller number of solid banks.
The economists want to see more concerted anti-inflation
measures to check the rise in the consumer price index, which is
estimated at 9.2 percent this year.
That is a major challenge because in so far as Indonesia is
concerned, curbing inflation is not mainly a matter of monetary
management and supply-demand equation but has deeper roots in the
cost structure of the economy as a whole.
"It is the inefficient economy that puts the natural rate of
our inflation at a high range of 7-10 percent a year, while our
neighboring countries can check their inflation at 3-5 percent,"
Sjahrir contends.
Indonesia's most senior economist Sumitro Djojohadikusumo is
pessimistic and feels that the government will not be able to
curb inflation at its annual target of five percent.
"I think inflation will range from 8.5 to 9 percent a year
during the 1994-1998 period," Sumitro says.
Theoretically, inflation will remain low as long as there is
spare capacity and inflation will start to rise once the slack is
absorbed.
In Indonesia's case, inflation is also imbedded in the high
cost structure of the economy. That is why the country's economy
seems unable to sustain high rates of growth for a long period of
time before hitting inflationary buffers.
According to Sumitro, Indonesia can actually sustain an annual
economic growth of up to 10 percent without high inflation -- if
the market distortions, distribution bottlenecks and bureaucratic
hurdles are removed.
Anti-inflation measures therefore should include the
continuation of overall economic reform (deregulation). In turn,
this will enhance fair market competition, efficiency and
smoother distribution of goods as well as bureaucratic reform.